The Roth conversion ladder, explained step by step

Convert one year of planned spending from your traditional IRA to a Roth IRA every year. Pay income tax on it now, ideally in a low bracket. Five tax years later, that converted amount can come out penalty-free. Keep converting each year and you build a ladder of money that unlocks one rung at a time.

1. Roll old 401(k)s into a traditional IRA so conversions are simple.
2. Estimate annual spending in early retirement.
3. Pick a target bracket and convert enough to fill it, not more.
4. Fund years one through five from taxable savings, cash, or Roth contributions.
5. Starting in year six, withdraw the conversion from five years earlier.
6. Repeat yearly, adjusting for income, deductions and health-insurance subsidies.

A couple retires at 45 with $900,000 in IRAs and $200,000 in a brokerage account. They spend $60,000 a year. Each year they convert $60,000. Years 45–49 are paid from the brokerage account. From age 50, the conversion made at 45 is available, and so on. The illustration ignores growth and taxes for clarity; your numbers will differ.

• Converting so much that you jump brackets or lose ACA premium credits.
• Forgetting each conversion has its own five-year clock.
• Paying the conversion tax out of the IRA itself before 59½.
• No bridge money for the first five years.

Atrium's Roth Conversion Ladder specialist maps your conversions year by year against your brackets, and the Tax Strategist checks the tax side.

What is a Roth conversion ladder?

A Roth conversion ladder is a series of yearly conversions from a traditional IRA or 401(k) into a Roth IRA. Each converted amount can be withdrawn without the 10% early-withdrawal penalty once five tax years have passed, which lets early retirees reach retirement money before age 59½.

How does the five-year rule work for conversions?

Each conversion has its own five-year clock, starting January 1 of the year you convert. Converted principal withdrawn before that clock ends, and before 59½, can owe the 10% penalty.

Do I pay tax when I convert?

Yes. The pre-tax amount you convert is added to your taxable income for that year. Ladders usually convert in low-income years to fill the lower tax brackets.

How much should I convert each year?

A common approach is to convert about one year of planned spending, sized so the extra income stays in a bracket you are comfortable paying. The right amount depends on your income, deductions, health-insurance subsidies and state tax.

What do I live on during the first five years?

You need a bridge: taxable brokerage savings, cash, Roth contributions (which can come out anytime), or 72(t) payments. Planning that bridge is the hardest part of a ladder.