How the Roth Conversion Ladder Works

Want to retire early? A Roth IRA conversion ladder could help you tap your tax-sheltered retirement accounts before age 59½—without the usual 10% penalty. With a Roth conversion ladder, you shift money from a tax-deferred retirement account—such as a traditional IRA or 401(k)—into a Roth IRA. But unlike a standard Roth IRA conversion, you do it multiple times over several years. If done correctly, you can withdraw the converted funds with no tax or penalty long before your 59th birthday.   

Roth IRA Basics

A few key distinctions set Roth IRAs apart from other tax-deferred retirement accounts:

• Roth IRA contributions are not tax-deductible (i.e., there’s no upfront tax break).
• You can withdraw your contributions (but not earnings) at any time with no tax or penalty. That’s because you make contributions with after-tax dollars, so you’ve already paid taxes on that money.
• Withdrawals of earnings are tax-free and penalty-free if you’re age 59½ or older and it’s been at least five years since you first contributed to a Roth account (the “five-year rule”).

That final point (the tax-free nature of withdrawals) is why Roth IRAs—and Roth IRA conversions—have become so popular.

Roth IRA Contribution and Income Limits

Though tax-free withdrawals are a significant perk, Roth IRAs have low contribution limits, which can make growing a sizable nest egg tricky. For the 2025 tax year, you can contribute a total of up to $7,000 to your IRA accounts. There’s also an extra $1,000 “catch-up” contribution if you’re age 50 or older.

To contribute to a Roth IRA, you must have “earned income” that equals or exceeds your contribution. There are also income limits, meaning your maximum Roth IRA contribution could be reduced to $0, depending on your modified adjusted gross income (MAGI) and filing status. To contribute the full amount in 2025, your MAGI had to be less than $150,000 if single or $236,000 if married and filing jointly.

Roth IRA Conversions

There’s a way to get around the Roth IRA’s low contribution limits while taking advantage of the tax-free growth and withdrawals: the Roth IRA conversion. This is where you move money from one of your other tax-advantaged retirement accounts—for example, traditional IRA, 401(k), or 403(b)—into a Roth IRA. Though the most you can contribute to a Roth IRA is $7,000 in 2025 ($8,000 if you are older than 50), there’s no limit on Roth IRA conversions.

The most significant upside of doing a Roth IRA conversion is getting tax-free withdrawals in retirement. This can be especially beneficial if you expect to be in a higher tax bracket when you retire—versus the one you’re in now.

Of course, the downside is that a conversion is taxable: You will owe ordinary income tax (but not an early withdrawal penalty) on the amount you transfer into the Roth. And it could be significant, particularly if the extra income pushes you into a higher tax bracket. As a result, investors often do Roth IRA conversions over several years.

The 5-Year Waiting Period

As noted, you can withdraw your Roth IRA contributions at any time without taxes or penalties. That’s true even if you haven’t reached your 59th birthday or if it’s been fewer than five years since you first contributed to a Roth account—or both.

Roth IRA conversions work differently. There’s a five-year waiting period for each conversion—meaning each one stands on its own. If you withdraw the converted amount before the five-year waiting period is up, the IRS will hit you with a 10% early withdrawal penalty (but no tax because you already paid ordinary income tax when you converted the funds). However, if you wait five years after each conversion, you can withdraw the money without tax or penalty. That’s where the Roth IRA conversion ladder comes in.

Roth IRA Conversion Ladders

You can create a series of tax-free and penalty-free withdrawals by “laddering” your Roth IRA conversions—that is, doing multiple Roth IRA conversions over several years.

Here’s an example. Say you want to retire at 45, and you anticipate needing $50,000 a year to live comfortably. Because you have to wait five years to withdraw each converted amount, you start building your ladder at age 40 by doing a Roth IRA conversion for $50,000.

The following year, you do another Roth IRA conversion for $50,000, and so on, until you reach age 54. At that point, the series of conversions you already did will cover you through age 59½. That’s when you can start taking penalty-free withdrawals from your other retirement accounts and tax- and penalty-free withdrawals from your Roth IRA (if you still have a balance).

Note that this strategy requires you to have $250,000 in retirement savings to convert. The same technique can be employed using lower amounts, of course—or higher ones. Ideally, you would plan early in retirement to save enough in your tax-advantaged retirement accounts to create a conversion ladder yielding what you need.

The following table illustrates how a Roth IRA conversion ladder might work: