How To Use A Roth Conversion Ladder For Early Retirement

How To Use A Roth Conversion Ladder For Early Retirement

Today I’m going to show you how to use a Roth Conversion Ladder to help fund your early retirement!

There is a lot of information helping people with their tax-advantaged accounts. 

We know that it is vital to use these accounts and most people funding their 401K or Roth IRA don’t worry about accessing the money before age 59 ½ since they are funding their typical mainstream retirement.  


What about those in the FIRE community who want to retire early?  


Luckily for us, there is a tool called the Roth Conversion Ladder


What is a Roth Conversion Ladder?

A Roth Conversion Ladder is a way to access funds from your retirement accounts early without paying the 10% penalty for early withdrawal.


How is a Roth IRA conversion taxed?

A Roth IRA Conversion is a taxable event since you are converting funds from a pre-tax account into a Roth account that will no longer be taxed in the future.


This tool is a legitimate way to fund your early retirement and possibly pay no tax on your 401K/IRA funds. Think about that!

These funds were contributed pre-tax and there is a way to access them BEFORE AGE 59 ½ and pay NO TAX!

Roth Conversion Ladder
Roth IRAs are unique because you can withdraw your own contributions before age 59 ½ as long as they were made over 5 years ago. 

The government also considers any money converted from an IRA to a Roth to be treated as a “contribution”.

This is critical to the success of the Roth Conversion Ladder. 

This means any “contribution” you make from an IRA to a Roth can be withdrawn penalty-free and tax-free as long as it has been in the Roth account for at least 5 years. 

As mentioned earlier, you DO have to pay taxes when you convert the money from an IRA to Roth account.

However, we in the FIRE community will benefit from paying much lower taxes because of our financial flexibility and frugal lifestyle.

We can convert the money in the years we don’t earn much traditional income like a W2 salary. 

Therefore, we will pay no taxes on some of the contributions, and be taxed at the lowest brackets for the rest.  


How Do We Set This Up?


Step 1

Figure out how much money you need each year for early retirement.  Then build a pre-tax account such as a 401K/403b or IRA to an amount that will sustain you throughout retirement. 

If you’re unsure of how much you need you can reference the 4% rule


Step 2

You will need to have funds readily accessible from savings, taxable, or an existing Roth IRA account.  These funds are to cover your living expenses for the first 5 years.  This is because you will have to wait at least 5 years after you make the conversion to start withdrawing the funds.  


Step 3

Set up your accounts with your brokerage firm.  You will need to open an IRA and a Roth IRA if you don’t already have these accounts in place. Once that’s in place, you can initiate a rollover of funds from your 401K to the Traditional IRA.  This is where the funds will stay until you are ready to convert them into the Roth account.

(Your brokerage firm can help you with this step. I personally use Vanguard and can say they are very helpful with setting this up for you)


Step 4

Prepare a chart or table of what your Roth Conversion Ladder will look like and remember to adjust for inflation.  Having this illustration will make things clearer and help you keep track of the funds.

Fortunately, I already made one for you!


Step 5

When you are ready to begin your early retirement you can start the conversion ladder and live off the funds in your savings, taxable, or existing Roth accounts (This is provided it has been more than 5 years since you contributed and you only withdraw your contributions, no gains!).

Once you hit the 5-year mark on the conversion ladder you can live off your Roth contributions.  Simply continue the ladder for the following years.


Now For An Example: 

If I need $35,000/year and assume inflation will be roughly 3% a year. 

I would need about $175,000 in a taxable or savings account to cover the first 5 years.

I would also like to pay no tax on most of the conversions and very little tax on the rest.


This is what that would look like:

Roth IRA Conversion Ladder

By 10 years into the ladder, I would have taken out $448,273 from my tax-advantaged accounts! 

If I started with $875,000 ($35,000 x 25) in my 401K, I would have been able to access more than half of my funds and pay little to no tax on that money! This is all way before the age of 59 ½


This is the power of a Roth Conversion Ladder for early retirees.  Above all, you are able to start the life you envisioned for yourself earlier!


I want to encourage you all to check out the resources I use on my FIRE journey:


FIRE Spreadsheet Financial Independence Spreadsheet


Roth IRA Conversion Ladder

Roth Conversion Ladder Spreadsheet 


These spreadsheets have formulas built-in so all you have to do is plug in your numbers.


If you have any questions or just want to share your own experience send me an email at: [email protected]