A Roth conversion ladder lets early retirees reach pre-tax 401(k) and IRA money before 59½ without the 10% early-withdrawal penalty. Each year you convert a slice of your traditional IRA to a Roth IRA and pay income tax on it. Five years later, that converted amount can come out of the Roth tax- and penalty-free. Convert every year and, after the first five, a new “rung” becomes available every year.
It works best when your income is low, as it usually is in early retirement, because conversions are taxed as ordinary income. The price is that you need about five years of spending from other sources while the first rungs ripen.
How does a Roth conversion ladder work? #
Three rules make it possible.
- Conversions are taxable, not penalized. Moving money from a traditional IRA to a Roth IRA adds the converted amount to your taxable income for that year. There’s no 10% penalty on the conversion itself.
- Roth withdrawals follow an ordering rule. Money comes out in this order: your regular contributions first, then conversions (oldest first), then earnings.
- Each conversion has its own five-year clock. If you’re under 59½, converted money withdrawn within five years can be hit with the 10% penalty. After five years, it’s penalty-free. The clock starts on January 1 of the year you convert, so a conversion in December 2026 is available in January 2031.
Because contributions and conversions come out before earnings, you can withdraw matured conversions without touching the growth, which stays in the Roth until 59½.
A step-by-step example #
You retire at 40 and need $45,000 a year. You have $800,000 in a traditional 401(k), which you roll into a traditional IRA, and $250,000 in a taxable brokerage account.
| Year | Age | Convert to Roth | Live on | First available |
|---|---|---|---|---|
| 1 | 40 | $45,000 | Taxable account | Year 6 |
| 2 | 41 | $45,000 | Taxable account | Year 7 |
| 3 | 42 | $45,000 | Taxable account | Year 8 |
| 4 | 43 | $45,000 | Taxable account | Year 9 |
| 5 | 44 | $45,000 | Taxable account | Year 10 |
| 6 | 45 | $45,000 | Year 1 conversion | Year 11 |
From year six on, each year you withdraw the conversion from five years earlier and make a new one. The taxable account covers the first five years’ spending ($225,000) plus the taxes on your conversions.
If you already have Roth contributions, those can shorten the bridge, since contributions come out tax- and penalty-free at any time.
How much tax will you pay on conversions? #
Low, if you plan it. With no salary, your conversion is often most of your taxable income. For 2026, according to the IRS:
| Filing status | Standard deduction | 10% bracket ends at | 12% bracket ends at |
|---|---|---|---|
| Single | $16,100 | $12,400 | $50,400 |
| Married filing jointly | $32,200 | $24,800 | $100,800 |
With no other income, that means:
- Married couple: the first $32,200 of conversions is covered by the standard deduction, so no federal tax. Up to $57,000 stays within the 10% bracket. A $57,000 conversion costs about $2,480 in federal tax, an effective rate around 4.4%.
- Single filer: a $45,000 conversion leaves $28,900 of taxable income, for about $3,220 in federal tax, around 7.2%.
Compare that with the 22% or 24% you likely saved when you contributed while working. That gap is the reason the ladder is so popular. Dividends and capital gains from your taxable account also count toward your income, so include them when you plan conversion amounts. State taxes vary.
Watch your ACA subsidy #
Conversions raise your modified adjusted gross income, and that’s what sets marketplace health insurance subsidies. For 2026 coverage, HealthCare.gov uses poverty guidelines of $15,960 for one person and $21,640 for two, and premium tax credits apply between 100% and 400% of those amounts, about $86,560 for a two-person household. Converting too much in one year can push you over the top and cost you the whole credit.
Many early retirees set their conversion to land comfortably inside the subsidy range. Our guide to health insurance in early retirement covers the trade-offs.
Roth conversion ladder vs 72(t) #
| Roth conversion ladder | 72(t) SEPP | |
|---|---|---|
| Wait before access | Five years per conversion | None |
| Flexibility | Change the amount every year | Fixed schedule for years |
| Needs a bridge fund | Yes, about five years of spending | No |
| Penalty risk | Low, if you track the dates | High, if you break the schedule |
The ladder usually wins for people who plan ahead and have a taxable bridge. A 72(t) plan fits when you need pre-tax money immediately. Some people use both: a small 72(t) on one IRA while a ladder builds on another.
Mistakes that cost money #
Paying the tax out of the conversion #
If your custodian withholds tax from the converted amount and you’re under 59½, the withheld portion counts as an early distribution and can owe the 10% penalty. Decline withholding and pay the tax from your taxable account or cash.
Not funding the bridge #
Without about five years of spending in taxable accounts, cash or Roth contributions, you’ll be tempted to withdraw conversions early. Size the bridge first. Our guide to how much cash to keep in early retirement helps with the cash part.
Mixing up the two five-year rules #
- The conversion rule: each conversion must wait five years before it’s penalty-free if you’re under 59½.
- The earnings rule: earnings are tax-free only after your first Roth IRA has been open five years and you’re 59½ or meet another exception.
The ladder depends on the first rule. Don’t plan to spend earnings before 59½.
Forgetting the pro-rata rule #
If any of your traditional IRAs hold after-tax (nondeductible) money, each conversion is treated as a proportional mix of pre-tax and after-tax dollars across all of them. Track it on IRS Form 8606.
Where Retire Goals fits #
Retire Goals won’t track conversion dates or taxes, so keep Form 8606 and a simple list of each conversion’s year for that. What it does help with is the bridge: its Will My Money Last calculator shows how many years a taxable account covers at a given spending level, with withdrawals rising for inflation. If the answer is less than five years, you know your bridge is short before you quit.
Frequently asked questions #
Can I do a Roth conversion ladder while still working? #
You can convert while working, but it’s usually expensive because the conversion stacks on top of your salary at your highest tax rate. The ladder works best once earned income drops to zero or close to it.
How do I track which Roth money is converted and which is contributions? #
Use IRS Form 8606, filed with your tax return in years you convert or take Roth distributions. It records your basis and conversions, and your records need to show when each conversion happened.
Do I need a separate Roth IRA for each year’s conversion? #
No. You can convert into the same Roth IRA every year. The IRS tracks conversions by the year they occur, not by account.
What if I withdraw a conversion before its five years are up? #
If you’re under 59½, the taxable part of that conversion can owe the 10% penalty. Because of the ordering rules, this only happens after you’ve taken out all your regular contributions and any matured conversions first.