Roth conversion ladder
Converting traditional retirement money to Roth each year so that, five tax years later, each conversion can be withdrawn without penalty before 59½.
Explanation
A Roth conversion moves money from a traditional IRA (or a 401(k), usually via a rollover) to a Roth IRA. The converted amount is taxed as ordinary income in the year of conversion. There is no income limit and no 10% penalty on the conversion itself.
Each conversion starts its own five-tax-year clock, beginning January 1 of the year you convert. A conversion done any time in 2026 becomes available January 1, 2031. If you are under 59½ and withdraw converted money before its clock finishes, the 10% penalty applies (though not income tax, since you already paid it). After age 59½, the per-conversion clock no longer matters for the penalty.
Roth IRA withdrawals follow an ordering rule: your regular contributions come out first, then conversions (oldest first), then earnings. Earnings are tax-free only once you are 59½ and your first Roth IRA has been open five years.
The “ladder” is a sequence: convert an amount each year that roughly matches the spending you will need five years later. After the first five years, each year’s rung matures and can be withdrawn. Meanwhile, you need a bridge: taxable savings, Roth contributions, cash, Rule of 55 or 72(t) withdrawals, to cover the first five years.
Conversions work best in low-income years, often filling the standard deduction and low brackets. Converting raises your AGI, which can affect ACA premium credits, so many early retirees size conversions with that in mind.
In scenarios, the app can schedule conversions, tax them in the conversion year, and track each rung’s five-year clock to know when it is available.
Example
You retire at 45 in 2026 with $800,000 in a traditional 401(k) rolled to an IRA, $200,000 in a taxable account, and $40,000 a year of spending.
| Tax year converted | Amount | Available penalty-free |
|---|---|---|
| 2026 | $40,000 | January 1, 2031 |
| 2027 | $40,000 | January 1, 2032 |
| 2028 | $40,000 | January 1, 2033 |
For 2026 through 2030, you live on the taxable account: 5 × $40,000 = $200,000. If you are married filing jointly with no other income, a $40,000 conversion in 2026 is taxed on $40,000 − $32,200 = $7,800, all at 10%, for about $780 of federal tax.