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How To Use A Roth Conversion Ladder For Early Retirement

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This means any “contribution” you make from an IRA to a Roth can be withdrawn penalty-free and tax-free as long as it has been in the Roth account for at least 5 years.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

Step 1: Calculate Yearly Expenses

You must first calculate how much money you need per year during 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 are unsure how much you need you can refer to What’s My FIRE Number? and the 4% rule


Step 2: Build A Savings

With Roth Conversion Ladders you have to wait at least 5 years after you make the conversions to start withdrawing the funds.  So, for those 5 years, it’s important you have money available from savings, taxable, or existing Roth IRA account.  These funds will cover your living expenses for the first 5 years. 


Step 3: Open an IRA & Roth IRA

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 use Vanguard and can say they are very helpful with setting this up for you)


Step 4: Prepare The Ladder

Prepare your Roth Conversion Ladder and remember to adjust for inflation.  Having this illustration will make things easier and help you keep track of the funds. 

Fortunately, I already made a Roth Conversion Ladder Spreadsheet for you!


Step 5: Start Conversions

When you are ready to begin your early retirement you can start the conversion ladder!  Transfer money from your traditional IRA to Roth IRA according to the ladder.  Use the money in your savings or taxable accounts while you wait for the conversions to be available for withdrawal from your Roth.

You can also use money from an existing Roth account, as long as they are contributions made over 5 years ago.  

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.

Roth Conversion Ladder Graphic


Roth Conversion Ladder 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 can 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:


Download A Free FIRE Calculator!


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.


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This information is my opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.