Roth IRA Conversion Ladder for Early Retirees: Decoded

Jeremy BiberdorfBy: Jeremy Biberdorf

August 7, 2019August 7, 2019

Roth IRA conversion ladder

There are several options available to you when it comes to taking care of personal finance for when you retire, especially if early retirement is the plan. For example, you can choose to use a traditional savings account, buy real estate, or opt to invest using a trading platform such as Vanguard, in order to try to improve your net worth. One of the most popular choices that people make is to invest as much money as they can in an IRA. After all, as Kelly Ann Smith writes for Forbes,

“When used correctly, IRAs are a potent tool to build retirement savings.”

If this applies to you, it’s likely that you have browsed through articles debating the Traditional IRA vs a Roth IRA. Making a decision about which one is best is subjective because both the Traditional IRA and Roth IRA have their pros and cons.

However, if you plan to retire early, you may have the opportunity to access your retirement funds prior to age 59 ½ without being penalized, by utilizing a conversion ladder technique to move retirement funds from a Traditional IRA to a Roth IRA. This can be important if you want to retain financial independence as you get older.

Table of Contents

What is an IRA?Traditional IRAsRoth IRAsInvesting in Traditional & Roth IRAsPros of Traditional IRAsCons of Traditional IRAsPros of Roth IRAsCons of Roth IRAs.Choosing a Roth IRA or a Traditional IRAConnection Between Roth IRA and Early RetirementsRoth IRA Conversion LadderStage 1: Contribute to a Traditional IRA During the First Stage of Your Working YearsStage 2: Gradually Convert to a Roth IRA at Least 5 Years Before You Plan to RetireStage 3: Utilize Your Contributions to Your Roth IRA for Early Retirement YearsRoth IRA Conversion Ladder TableYou Cannot Throw Caution to the WindCons of Roth IRA ConversionWho the Roth IRA Conversion Ladder Works Best For

What is an IRA?

Individual Retirement Accounts (IRA) are investing tools that help an individual save for retirement in a tax efficient manner. There are many variants of IRAs such as Traditional IRAs, Roth IRAs, SIMPLE IRAs, Roth 401k IRAs, and others. Each type of IRA has eligibility requirements and the 401k is notable for the employer match element. The most commonly used IRAs are Traditional IRAs and Roth IRAs.

Traditional IRAs

You get the advantage of tax-free contributions when you invest through Traditional IRAs. The most significant advantage of a Traditional IRA is that you get tax deferred on your earnings up to the time that you withdraw funds from the IRA which is a positive factor if you have a high gross income and are liable for a large amount of federal income tax.

Roth IRAs

Unlike Traditional IRAs, Roth IRAs contributions are made with after-tax dollars.  However, as long as you are making qualified distributions by following the five-year rule and meeting the other required criteria, those withdrawals you make are not taxed. In simple terms, that means your earnings are tax-free which is an important benefit of a Roth account.

Investing in Traditional & Roth IRAs

Every form of IRA has strengths and weaknesses. It is essential to fully understand your investments, tax sheltering vehicles, and to create a structure that will maximize your portfolio size and minimize the tax bill. As an early retiree, it is critical that you have your retirement planning figured out.

Pros of Traditional IRAs

  • Funded with pre-tax monies (or tax-deductible funds)
  • No income limits to get started (higher or lower both)

Cons of Traditional IRAs

  • Withdrawal before 59 ½ has a 10 percent penalty.
  • Withdrawals are taxed based on your income tax bracket at the time of the withdrawal.
  • Contribution limits that are applied.
  • After 70 ½ you can no longer make contributions.
  • Withdrawals are required – based on a formula using current account balance and life expectancy – the year you turn 70 ½. These are referred to as required minimum distributions (RMDs).

Pros of Roth IRAs

  • Tax-free withdrawals.
  • Earnings are tax-free.
  • You can continue your investments after the age of 70 ½.

Cons of Roth IRAs.

  • Contributions into your Roth IRA are not tax-deductible so it’s one of many taxable investments.
  • Have restrictions on how much you can contribute.

Choosing a Roth IRA or a Traditional IRA

When choosing between a Traditional IRA and a Roth IRA, you are basically picking when you need to pay tax on your money. With a Traditional IRA, you pay taxes on your withdrawals.   With a Roth IRA, you pay the tax on your money before investing.

Connection Between Roth IRA and Early Retirements

If you are planning to retire early, there are some strategies you can use that will help you access your retirement funds before age 59 ½ without being penalized.

With a Roth IRA, once your funds have been invested for five years, you can withdraw them without paying the 10% tax penalty.  The five-year mark is calculated beginning the first tax year after the investment into the IRA and as long as you adhere to it you can avoid an early withdrawal penalty.

It’s also important to note the difference between Roth IRA contributions and Roth IRA earnings.  Roth IRA contributions have already been taxed, the earnings, however, have not. In order to withdraw the earnings from your Roth IRA, and not be penalized, you must wait a minimum of five years and be aged 59 ½, be disabled, or be using the withdrawal for a qualified purchase of your first home (see IRS Publication 590B for additional information).

If you are retiring early, you can withdraw your contributions from your Roth IRA account. For individuals with Traditional IRAs, who are planning to retire early, it may make sense to convert some of your Traditional IRA funds to a Roth IRA using a laddering technique which is a backdoor means of being able to access income without facing high levels of taxation.

Roth IRA Conversion Ladder

We are going to look at the conversion ladder in three stages.

Stage 1: Contribute to a Traditional IRA During the First Stage of Your Working Years

A Traditional IRA uses pre-taxed funds to invest for retirement. In your Traditional IRA, your funds are tax-deductible but it’s a taxable account in that funds are taxed as income when you withdraw them.

Stage 2: Gradually Convert to a Roth IRA at Least 5 Years Before You Plan to Retire

When you withdraw funds from your Traditional IRA, you will create a taxable event. That means that the funds you withdraw will be subject to taxes at your current income tax rate. As long as you move the money into your Roth IRA within 60 days you’ll avoid paying a penalty on an early withdrawal.  It is likely that your broker or account holder will be able to reassign a portion of the traditional IRA to the Roth IRA without ever sending you a check; this is the simplest option and the one we recommend.

Stage 3: Utilize Your Contributions to Your Roth IRA for Early Retirement Years

Any funds you have moved from your Traditional IRA to a Roth IRA can be withdrawn after the five-year waiting period. Because these funds have already been taxed, you will not pay taxes on these withdrawals. It is important that you time your withdrawals, and plan for the correct amounts so that you are not using any of the investment earnings.  If you use investment earnings before age 59 ½, even after the five years has passed, you will pay a 10% penalty on the whole amount of that distribution, even if only a small portion of it was funded from investment earnings.

Roth IRA Conversion Ladder Table

This case study will provide you with detailed insight regarding the Roth conversion ladder loophole.  The conversion you make could be for the entire amount of a Traditional IRA valued at $400,000 with the conversion spanning 10 years. It could also be a conversion of the amount of $400,000 based on the amount someone has determined that they will need between the time he/she retires until the time he/she turns 59 ½.

Keep in mind, that with this example, there will be $40,000 per year of taxable income that is above and beyond the amount that would have been due otherwise. In some cases, a taxable income increase of $40,000 may increase the income tax bracket and cause undue hardship for an individual or family. This is one of the factors that you need to take into account when considering a traditional to Roth conversion. It’s up to you to gauge the amount of money you wish to convert.

YearAgeConversion Amount *Potential amount withdrawn *Sources of funds withdrawn
20224540000400002017 conversion
20234640000400002018 conversion
20244740000400002019 conversion
20254840000400002020 conversion.
20264940000400002021 conversion

*These amounts refer to Roth IRA

This table makes it clear that you cannot withdraw before five years. If you do, you will pay a 10% penalty on each withdrawal. You need to refrain from withdrawing early if you want to remain penalty-free.

This is a critical table and should be used as a template for your investment planning. You need to consider the following elements before you take action.

The first thing to consider is your planned retirement age. The model will only work if you are able to start the conversion at least five years before your retirement.  You should also evaluate and project your expenses during your early retirement years. The amount of conversion needs to be planned accordingly.

If you cannot trust yourself to stick to a plan or you worry that you will be tempted to withdraw more money than you planned because you don’t have to pay taxes on it, you might be better served to leave the majority of your funds in your Traditional IRA and only converting the amount necessary for the early retirement.

You Cannot Throw Caution to the Wind

You have to ask yourself some basic questions – which federal tax bracket would you say you are in today? Do you expect to be in a higher or lower tax bracket after you retire? Will your yearly income increase or decrease? Answering these questions will help you minimize taxes during your retirement.

Many people have made their retirement plans expecting that they will be in a lower tax bracket after they retire. That may not be true.  You will be collecting (and owing taxes on) Social Security payments.

You may choose to do some consulting or freelance work as a side hustle, on which you will need to pay self-employment tax. Furthermore, once the children move out, and you stop contributing to your retirement savings, you lose some significant tax deductions and tax credits.

This could leave you with higher taxable income, even after you retire.

Cons of Roth IRA Conversion

Roth IRA Conversion Ladder is a tool for financial planning. You need to make decisions based on what you know and what you expect will be best for you in the future. Each part of your financial journey needs to be considered before you start implementing an IRA conversion plan.

Here are some of the cons of the Roth IRA Conversion Ladder:

  • There will likely be a tax liability on the amount you convert each year.
  • The conversion amount could lead to you being in a higher tax bracket which could increase your overall tax liability, not just the tax on the converted amount.
  • There is a five-year waiting period even if you convert your funds after you are 59 ½ years old.
  • Financial discipline needed for adhering to your financial and retirement goals is critical for a Roth IRA Conversion Ladder to succeed.

Who the Roth IRA Conversion Ladder Works Best For

  • Early retirees with low income: People who live on modest income from long-term capital gains which are taxed at zero percent, or are paying taxes of less than 15%.
  • Retirees who are willing to stretch the transition from IRA to Roth IRA: Transitions from a Traditional IRA to a Roth IRA are taxed as regular income, so it’s useful to spread the change over as long a time frame as possible. That way, you will not increase your taxable income too much in any given year.


A Roth IRA Conversion Ladder is helpful for early retirees. It can help you make some of your retirement funds available to you prior to age 59 ½ as you are able to make IRA withdrawals. Mapping it out prior to actually making the first conversion can also help plan for changes in your tax liability due to the conversion.

In addition to discussing your plans with your broker or brokerage account holder, you should also consult your tax preparer and you can do some research yourself, such as listening to an investment podcast or reading the latest literature on the subject. This conversion is likely only one part of your overall retirement planning, and you need to make sure that it fits your overall retirement strategy and is a positive passive income.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

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