If you're planning to retire before 59½, you already know the penalty problem: touch your 401(k) early and the IRS takes 10% off the top, plus ordinary income tax. What most people don't realize is that the solution is sitting in plain sight — and most FIRE spreadsheets ignore it entirely.
Your taxable brokerage account is your bridge.
Why the Order of Withdrawals Matters More Than the Total
A common mistake early retirees make is thinking about retirement in aggregate — "I have $860,000, I need $40,000/year, so I have 21 years." That math is dangerously wrong for two reasons:
- It ignores account type — money in a 401(k) is not the same as money in a taxable account, because accessing it costs you.
- It ignores tax efficiency — the sequence in which you withdraw determines how much of your money actually goes to taxes vs. your life.
The right order during the bridge years (before 59½) is:
- Taxable brokerage first — long-term capital gains rates are 0% for many early retirees with low income
- Roth IRA contributions (not earnings) — you can always withdraw your contributions penalty-free
- 401(k) last — only after 59½, or via Rule 72(t) if necessary
The Math: Why This Saves You Tens of Thousands
Let's use our example: retiring at 52 with $120,000 in taxable, $650,000 in 401(k), and $90,000 in Roth. Spending: $40,000/year.
Wrong approach (tap 401k immediately): $40,000 withdrawal + 10% penalty = $4,000 gone. Plus income tax on the full amount. At a 22% marginal rate, you'd owe ~$12,800 in tax, meaning you'd need to withdraw ~$56,000 to net $40,000.
Right approach (taxable bridge): With $40,000 in long-term capital gains, a couple filing jointly with no other income pays $0 in federal capital gains tax in 2025 — the 0% bracket extends to ~$94,000 of income.
Over a 7.5-year bridge (ages 52–59½), that's potentially $84,000 in tax savings by simply withdrawing in the right order.
What Happens to the 401(k) During the Bridge Years
This is the elegant part of the bridge strategy. While you're living off your taxable account, your 401(k) is:
- Continuing to grow tax-deferred at your expected return rate (5% in our model)
- Getting bigger every year you don't touch it
- Positioning you for Roth conversions in low-income years
A $650,000 401(k) at 5% annual return becomes approximately $920,000 by the time you're 59½. You've added $270,000 to your retirement by simply not touching it.
The Roth Conversion Ladder: Your Advanced Move
Once you're retired and in a low-income year, you can convert traditional 401(k) money into a Roth IRA at low tax rates. The conversion is taxed as ordinary income — but if you're living on $40,000/year from your taxable account, you may have room to convert another $50,000–$60,000 and stay in the 12% bracket.
After 5 years, those converted funds are accessible penalty-free. If you start the ladder at 52, you have penalty-free Roth conversion funds available at 57 — two years before 59½.
The Bottom Line
The bridge strategy isn't complicated — it's just counterintuitive. Most people assume you should touch the biggest account first. The reality is that patience with your 401(k) during the early years compounds dramatically, and your taxable brokerage — often the "smallest" account — is actually your most valuable early retirement asset.
Download the free Bridge Planner to model exactly how this works with your specific numbers.