[stouset]

> And there are penalties for withdrawing before 59.5years, which I would call the "retirement age" on these plans.

Sort of, but in practice not really if you're smart about it and plan a bit in advance.

If you want to retire early and access 401(k) or traditional IRA funds, you can do so without incurring additional taxes or penalties. The strategy is called a "Roth conversion ladder". It takes advantage of the fact that you can always withdraw Roth principal (not investment returns) before any retirement age penalty-free (as long as those funds have been in the Roth for at least five years).

The general outline is that you roll over some of your 401(k) or IRA funds into a Roth IRA every year. This causes those funds to be taxed as regular income tax, but your income is almost certainly going to be dramatically lower than during your earning years, putting you in a much lower tax bracket. This entire amount that was rolled over is now considered principal, and in five years you can use it penalty-free per the Roth rules. Every year you roll over what you expect to need in five years. Once you bridge that first five years (perhaps with preexisting Roth funds), you now have a recurring source of income through your Roth.

Yes, this is some additional complication and requires some planning. But it's not particularly onerous. GP is right that you're likely making a pretty big mistake, paying 40%–50% tax rates (on the marginal top end of your income) in order to avoid some restrictions that are—in most cases—pretty easily bypassed. That's not to say there aren't some very legitimate reasons for keeping money in accounts that don't come with restrictions, but paying 40%—50% in taxes for that privilege makes those situations comparatively rare.

I will absolutely agree that the fact that you need to know these sorts of "tricks" is one of many indefensible parts of our retirement system. And of course, there's always the risk of the rules changing out from under you. But cases where that actually happens in a way that causes significant impact are uncommon in practice.

[dgildeh]

Thanks for the info - funnily enough after I posted this I spoke to a tax strategist this morning who also laid out a bunch of things we could do to reduce our tax bill. The problem as you say, is this type of person isn't accessible to most people, and expensive!

[stouset]

/r/personalfinance is a phenomenal resource where this kind of info is freely available, and the advice therein more or less obviates the need for tax strategists and financial advisors for what I'd estimate is something like 80% of people.

There's even crazier options like the Mega Backdoor which require working at a company with an excellent benefits package. When combined with a normal Roth backdoor and an HSA, they allow a high earner to set aside $22,500 in a traditional 401(k) and $50,000 in Roth accounts, for $72,500 in tax-advantaged savings every year. With the information from my previous comment, this means that every year you do this equates to $50,000/yr you can spend in early retirement completely tax- and penalty-free

It's absolutely insane to me and also completely indefensible that simple access to this level of tax-avoidance is available to people based on their employer. Someone who earns the same level of income but at a different employer without a 401(k) only has the opportunity to set aside $6,500 (solely in a Roth IRA). And even doing that requires knowing about the backdoor "trick".