A Roth IRA Conversion Ladder can be your first step to early retirement. Here's how to create a conversion ladder today.

There are plenty of articles on personal finance blogs promoting early retirement, and showing you how to make it happen. While it may be possible to save up enough money to retire at an early age, you’ll run into a problem if you try to withdraw from your accounts prior to age 59 ½. That is when you can access retirement money without having to pay a 10% early withdrawal penalty.

One of the common solutions is to have money saved in regular taxable accounts. You can always access that money without having to pay taxes or penalties. But the problem with taxable accounts is that it’s simply not as easy to accumulate large amounts of money in them.

Most people have most of their savings in tax-sheltered retirement plans. That’s because the contributions are generally tax-deductible, and the investment earnings accumulate on a tax-deferred basis. When you save in taxable accounts, there’s no tax deduction for contributions, and no tax deferral of investment earnings. That makes it a difficult way to save the kind of money that you need for early retirement.

That’s where a Roth IRA conversion ladder comes into the picture. If done right, you can begin taking withdrawals from the plan tax-free and penalty-free long before you reach 59 ½.

Roth IRA basics

Roth IRAs function much like other tax-deferred retirement plans, but with two primary exceptions:

  1. Contributions to a Roth IRA are not tax-deductible, and
  2. Distributions—both contributions and investment earnings—from the plan are tax-free, as long as you are at least 59 ½ and you have had a Roth IRA in place for at least five years.

The second exception is the obvious attraction of a Roth IRA. It’s also why Roth IRA conversions have become so popular.

In a conversion, you transfer money from other retirement plans into a Roth IRA. Five years after the conversion the money becomes eligible for tax-free withdrawals after age 59 ½.

The main disadvantage to a Roth IRA conversion is that you have to pay income tax—but not the 10% early withdrawal penalty—on the amount converted.

For example, if you were to convert $50,000 from a traditional IRA to a Roth IRA, and you are in the 15% tax bracket, you will have to pay income tax of $7,500 in the year of conversion.

Fortunately, once you do actually retire and continue doing Roth IRA conversions, your income should fall—in fact, it may be limited to just your Roth IRA withdrawals. That would mean that at least some of your conversion would be tax-free and the amount that is taxable would be at a very low rate.

But, Roth IRAs also have a special provision, and that’s what makes them an important part of an early retirement strategy.

If, at this point, you’re thinking to yourself – ‘man, this all seems really complicated’ – don’t fear! A company called Blooom will manage your IRA for you, and if you tell Blooom that you’re looking to retire early, they’ll take that into consideration and rebalance your portfolio accordingly.

Roth IRAs and early retirement

Another area where Roth IRAs differ from other types of retirement plans is that you can withdraw your contributions from the plan without having to pay tax on the amount of the distribution.

However, when you do a Roth IRA conversion, there is a five-year rule that applies to the withdrawal of those conversions. But if you delay withdrawing those contributions for at least five years, the 10% penalty does not apply.

This is where it’s important to realize that each Roth IRA conversion must stand on its own. That means that there is a new five-year waiting period for each and every conversion that you do.

That’s where the Roth IRA conversion ladder enters the picture.

The Roth IRA conversion ladder

You can create a series of tax-free, penalty-free withdrawals of Roth conversion balances by “laddering” those conversions. Since you will have to wait five years after each conversion to be able to withdraw your conversion balance untaxed, begin doing annual Roth IRA conversions starting at least five years before you plan to retire early.

For example, if you plan to retire at 45 and you think you’ll need $50,000 per year to live, you should do a Roth IRA conversion for that amount at age 40.

You will then have to do a Roth IRA conversion for at least $50,000 each year up until age 54. That will cover you through age 59 ½, when you will be able to take at least penalty-free withdrawals from all of your retirement plans – and tax-free withdrawals from whatever remains in your Roth IRA plan.

Naturally, you can reduce the amount of the Roth IRA conversion based on expected cash flow from other sources. This can include withdrawals from taxable investments, as well as any earned income or passive income sources you expect to have. A partial Roth IRA income strategy can work if you semi-retire early, and then fully retire later.

Roth IRA Conversion ladder table

The Roth IRA conversion ladder is a multistep, multiyear strategy. The best way to illustrate how it works is with a table:

YearAge at the time of ActionRoth IRA Conversion AmountRoth IRA Withdrawal AmountSource of Funds Withdrawn
20234550000500002018 Conversion
20244650000500002019 Conversion
20254750000500002020 Conversion
20264850000500002021 Conversion
20274950000500002022 Conversion

The table shows just 10 years of the process. But again, if you were to retire at 45, you need to continue doing annual Roth IRA conversions through to age 54.

You have to make sure you’ll have other retirement assets at age 59 ½

This is the one big caveat in regard to the Roth IRA conversion ladder for early retirement. If you convert all of your retirement accounts over to a Roth IRA, and then fully deplete the funds in early retirement, you’ll defeat the whole purpose of the ladder. After all, you won’t even be eligible for Social Security and most pension benefits by 59 ½.

The basic purpose of the Roth IRA conversion ladder is to provide you with a tax-free, penalty-free source of income during early retirement. But there still needs to be a large enough amount of retirement savings so that you can continue in retirement for the rest of your life.

But since we all know that early retirement requires a lot of savings under any circumstances, it’s mostly a matter of apportioning those savings between your early retirement and the normal retirement years.


If you want to retire early (who doesn’t?), and you have the means to do so, Roth IRA conversions will give you access to your money, tax-free. But don’t rely solely on your Roth IRA. You’ll want to have other means of retirement to support you until you reach legal retirement age when you can earn other benefits.

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About the author

Total Articles: 165
Kevin Mercadante is a freelance personal finance blogger and the owner of his own personal finance blog, OutOfYourRut.com. A recent transplant to New England, he has backgrounds in both accounting and the mortgage industry.

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1 comment
Vinessa Burnett says:

Hi Kevin, what would this process look like if you have a Roth 401(k)? I’m assuming you could just rollover the Roth 401(k) to the Roth IRA, but do you still have to wait 5 years toa void the 10% penalty?