Roth IRA
July 17, 2023

What Is a Roth Conversion Ladder and How Does It Work?

Stewart Willis

When planning for retirement, you want to use every possible avenue to secure a stable financial future. Your retirement years should be spent with your mind at ease, so you can enjoy the fruits of your labor.

A Roth conversion ladder is a Roth conversion strategy that helps you access your savings faster.

What Is a Roth Conversion Ladder?

Roth conversion ladders are a powerful financial tool that can help early retirees minimize taxes on their retirement funds. It's an excellent provision to have in place if you decide to retire before you turn age 59 ½. If you don’t exceed the income threshold for a Roth IRA, then you can pursue a Roth conversion as a workaround. Early retirement could be a reality for you with a Roth conversion ladder as part of your retirement planning.

Unfortunately, a large 401k or traditional IRA to a Roth conversion could be a huge tax liability. This is where a Roth conversion ladder is helpful—it allows you to spread out your 401k to IRA conversions to Roth over time.

A Roth conversion ladder could help you get access to your retirement accounts before you turn 59 ½. By following this strategy, you can withdraw funds without paying the 10% penalty. Being able to withdraw from your retirement savings could be helpful for a variety of reasons.

How Does a Roth IRA Conversion Ladder Work?

Roth IRA conversion ladders allow you to convert a portion of your pre-tax retirement account into a Roth IRA. Pre-tax or tax-deferred retirement accounts include traditional IRAs and 401ks.

The conversion ladder allows you to pay taxes on the converted amount at a lower overall rate by spreading out the cost of conversions over time. The goal is to reduce the overall tax burden you will face.

For example, if you make a lump-sum conversion from a 401k to Roth IRA, you would need to pay taxes on that conversion for the year. This could increase your tax bracket. However, if you were to start a 401k to Roth IRA conversion ladder, you would make several conversions in a lower tax bracket, saving you from unnecessary income taxes. The same applies if you convert an IRA to a Roth IRA.

If you were in a higher tax bracket by the time you retire, it would make sense to spread out your Roth conversions to avoid high taxes. People make Roth conversions to take advantage of tax benefits and penalty-free withdrawals.

For example, if you were to start a 401k to Roth conversion ladder, you would pay a lower income tax rate on those withdrawals. If you withdraw from a pre-tax retirement account when your income is higher, you’ll lose your hard-earned money.

Roth Conversion Rules

Roth conversion ladders can seem like a cure-all to all your financial woes, especially if you plan on early retirement. However, there are some Roth conversion rules you should keep in mind before you pursue this strategy.

What Is the 5-Year Roth Conversion Rule?

You can withdraw your Roth IRA contributions without tax at any time. However, contributing to a Roth IRA works differently than converting to a Roth IRA i The five-year Roth conversion rule dictates that you must wait five years before you withdraw converted funds from your Roth account.

After the five-year waiting period for a converted amount in your Roth IRA has elapsed, you can withdraw that specific amount without any penalties. You can do this regardless of your age. However, this penalty-free withdrawal only applies to the converted amounts and not to any earnings accumulated on those amounts in the Roth IRA.

With Roth ladder conversions, you are taking a multi-year approach to spreading out your conversions, creating a “ladder” of conversions. If you make a withdrawal before the five-year period, the IRS will issue an early withdrawal penalty.

It would be nice to have access to all of your funds in your Roth IRA account. Unfortunately, converting a lump sum of money from a tax-deferred retirement account will likely increase your tax bracket and your tax bill.

The IRS also has ordering rules for Roth IRA withdrawals. Roth IRA contributions take priority, followed by converted amounts on a first-in, first-out basis, and finally earnings on investments. This will help you to plan ahead when you start your Roth conversion ladder to avoid potential tax implications and ensure proper management of the money you convert.

A Roth conversion ladder strategy demands meticulous planning. You should calculate the precise amount to convert annually while considering the tax consequences. Initiating the ladder well in advance of needing the funds to accommodate the mandatory five-year waiting periods.

How to Avoid the 5-Year Rule

There are special provisions that could allow an early withdrawal without penalty. These exceptions would include:

  • A first-time home purchase
  • Expenses related to education (for example, tuition)
  • Health insurance premiums while unemployed

What Is Roth Recharacterization?

Before you undergo a Roth conversion ladder, consider the risks and consequences. It’s always best to have a financial advisor to ensure you’re making a decision that makes sense for your situation. The Tax Cuts and Jobs Act of 2017 brought significant changes to Roth conversions.

One key impact is eliminating the option to "recharacterize" or undo Roth conversions. Once your funds have been converted to a Roth IRA, there is no turning back to a traditional IRA. It's crucial for individuals to carefully consider the implications of such conversions under the new regulations.

Should I Do a Roth Conversion Ladder?

For those planning to retire early, a Roth conversion ladder can be invaluable. Of course, you should consult with a financial planner to better understand how this can help you.

The main disadvantage of a Roth conversion ladder is the upfront tax liability. While spreading out the conversions over the years can ease that burden, other options may be better for you. If your tax bracket is lower in the future, then a Roth conversion ladder would have diminished value.

Note with early retirement written on it.

Converting to a Roth IRA can boost your income, potentially impacting your eligibility for key tax credits and government benefits. This move and increase in your income could also affect your Medicare premiums and Social Security taxation.

A Roth conversion ladder calculator may help you get some perspective on this, but a tax professional can advise you on the best strategy for your specific needs.

The timing of conversions can be a strategic move influenced by market conditions. For instance, it could be beneficial to convert your IRA to a Roth IRA when market values are lower to potentially reduce the tax impact.

In times of soaring inflation, the value of your money diminishes, and you'll need a larger sum to meet the same expenses in the future. By undergoing a Roth conversion at current rates you secure a lower tax expense compared to what you might end up paying on withdrawals from a conventional retirement account in the future. This is because both tax rates and withdrawal amounts could escalate due to inflation.

Many individuals prefer Roth IRAs over traditional IRAs and 401ks because you don't have to take required minimum distributions at a certain age. This provides more control and flexibility to you when it comes to planning your retirement income.

Whether or not you should pursue a Roth conversion ladder should depend on your financial situation. You should consult with a tax advisor and financial planner who can give you insight into your unique situation.

When you discuss your goals and objectives with Asset Preservation Wealth and Tax, we consider that. Our goal is to establish a financial plan that is tailored to you.

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A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to and search by our firm name or by our CRD # 175083.

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