Roth Conversion Ladder: Everything You Need To Know

This article shows you how to use a Roth Conversion Ladder to help fund your early retirement!

There is a lot of information helping people with their tax-advantaged accounts.

It is vital to use these accounts, and most people funding their 401k or Roth IRA don't worry about accessing the money before age 59 ½ since they are thinking about a typical retirement.

What about those in the FIRE community who want to retire early?

Luckily for us, there is a tool called the Roth Conversion Ladder


What Is a Roth Conversion Ladder?

A Roth Conversion Ladder can access funds from your retirement accounts early without paying the 10% penalty for early withdrawal.

It works by making strategic “conversions” or transfers from your Traditional IRA account to your Roth IRA account.

By making these conversions, you can access that money from your Roth account after 5 years, penalty-free.

This conversion is called a Roth Conversion “Ladder” because it involves transferring money today that you will use 5 years in the future.

Then, the following year you will make another conversion available 5 years after that.

This way, you build a “ladder” of money to sustain you throughout your early retirement.

This might not seem apparent initially, but it is an easy process, especially with my free Roth Conversion Spreadsheet.


How Is a Roth IRA Conversion Taxed?

A Roth IRA Conversion is a taxable event since you are converting funds from a pre-tax account into a Roth account that will no longer be taxed.

This tool is a legitimate way to fund your early retirement and possibly pay no tax on your 401K/IRA funds.  Think about that!

These funds were contributed pre-tax, and there is a way to access them BEFORE AGE 59 ½ and pay NO TAX!

Roth Conversion Ladder
Roth IRAs are unique because you can withdraw your contributions before age 59 ½ as long as they were made 5 years ago.

The government also considers any money converted from an IRA to a Roth as a “contribution.”

This is critical to the success of the Roth Conversion Ladder.  

This means any “contribution” you make from a Traditional IRA to a Roth account can be withdrawn penalty-free and tax-free as long as it has been in the Roth account for at least 5 years.

You DO have to pay taxes when you convert the money from an IRA to Roth account.

However, we in the FIRE community will benefit from paying much lower taxes because of our financial flexibility and frugal lifestyle.

You can convert the money while not earning much traditional income, such as a W-2 salary.

Therefore, you pay no taxes on some contributions and are taxed at the lowest brackets for the rest.

Roth Conversion Ladder Graphic 

How To Set Up A Roth Conversion Ladder

Step 1: Calculate Yearly Expenses

The first step is calculating how much money you need per year during early retirement.

Then build a pre-tax account such as a 401K/403b or IRA to an amount that will sustain you throughout retirement.

If you are unsure how much you need, refer to What's My FIRE Number?  and the 4% rule


Step 2: Build A Savings

With Roth Conversion Ladders, you have to wait at least 5 years after making the conversions to withdraw the funds.

So, for those 5 years, you must have money available from savings, taxable, or existing Roth IRA accounts.

These funds will cover your living expenses for the first 5 years.

Therefore, it's good to save at least 5 years' worth of living expenses.

This also helps you maximize your tax savings by keeping your earned income to a minimum during the conversion years.


Step 3: Open An IRA & Roth IRA

You will need to open an IRA and a Roth IRA if you don't already have these accounts in place.

Once that's in place, you can initiate a rollover of funds from your 401k to the Traditional IRA.

This is where the funds will stay until you are ready to convert them into a Roth account.

(Your brokerage firm can help you with this step)

I use Vanguard and can say they are accommodating with setting this up for you)

The transfer from your 401k to your traditional IRA is not a taxable event.

However, you can't transfer your money from a 401k to a Roth account.

Therefore, this is a necessary step in the Roth Conversion Ladder.


Step 4: Prepare The Ladder

Prepare your Roth Conversion Ladder by downloading my free Roth Conversion Spreadsheet.

This spreadsheet builds your conversion ladder and adjusts for inflation.

The only number you need to insert is your yearly expenses.

This tool will simplify things and help you keep track of the funds.

I provide an example later in this article, but there is one more step to complete the Roth Conversion Ladder.


Step 5: Start Conversions

You can start the conversion ladder when you are ready to begin your early retirement!

First, transfer the money you need to cover your living expenses from your traditional IRA to Roth IRA.

You do this every year for the first 5 years.

After that, you can adjust the conversion amounts to balance the yearly expenses you want to cover and the tax you want to pay.

You can convert as much or as little as you want.

Then, use the money in your savings or taxable accounts while waiting for the conversions to mature for withdrawal (5 years) from your Roth account.

You can also use money from an existing Roth account as long as they were contributions made over 5 years ago.

Once you hit the 5-year mark on the conversion ladder, you can live off your Roth contributions.

Then, continue the ladder for the following years or as long as necessary.


Roth Conversion Ladder Example

Here is an example of a Roth Conversion Ladder:

Suppose you need $35,000 annually and assume inflation will be 3% yearly.

You would need about $175,000 in a taxable or savings account to cover the first 5 years.

You would also like to pay no tax on most conversions and very little tax on the rest.

This is what a Roth Conversion Ladder looks like:

Roth IRA Conversion Ladder

By 10 years into the ladder, you would have taken out $448,273 from your tax-advantaged accounts!

If you started with $875,000 ($35,000 x 25) in a 401K, you would have been able to access more than half of that money and pay little to no tax on it.

This is all way before the age of 59 ½.

This is the power of a Roth Conversion Ladder for early retirees.

Above all, you can start the life you envisioned for yourself earlier!


Pay No Tax On Your Roth Conversion Ladder

The best way to pay no tax on your Roth Conversion Ladder is to lower your cost of living.

Doing this allows you to take advantage of your lowest tax bracket and applicable tax credits.

If you are single, you can convert up to $13,850 and pay no tax on your Roth conversion ladder using the standard deduction.

For married couples filing jointly, you can convert up to $27,700.

This doesn't include other credits like the child tax credit or charitable donations.

Since this is highly dependent on lower your cost of living and your adjusted gross income (AGI), here are some tips for doing just that.


Lower Your Adjusted Gross Income (AGI)

You can lower your adjusted gross income (AGI) by contributing to a 401k or traditional IRA if you make money after starting the Roth conversion ladder.

This is interesting because while you make conversions from your pre-tax accounts, you can still contribute and get yourself in the lowest tax bracket.

I recommend following this order of investments to maximize your tax savings.


Pay Off Your Mortgage

Paying your mortgage early is a hotly debated topic in the personal finance community.

However, a mortgage is usually our most significant expense.

Therefore, increasing our yearly expenditures pushes us into a higher tax bracket.

You can quickly lower your yearly expenses by 20% to 30% by paying off your mortgage.

In addition, this gives you more room to do Roth conversions before hitting a new tax bracket.

I would suggest considering your situation or preference in this case.

Some might prefer to maximize their investments while keeping a mortgage at a low-interest rate.

Others like myself enjoy living a debt-free and Lean FIRE lifestyle.

Therefore, part of my plan is to pay off my mortgage.

Whichever you choose, there is no denying that not having a mortgage payment will help you pay less tax on your Roth Conversion Ladder.


FIRE Resources

I hope you found this article helpful and that it helps you on your FIRE journey.

I also want to encourage you to check out the other resources I use on my FIRE journey:


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These spreadsheets have formulas built-in, so all you have to do is plug in your numbers.

Lastly, check out our related posts about financial independence below.