Climbing Into a Tax-Sheltered Retirement: The Benefits of a Roth Conversion Ladder

A Roth conversion ladder allows you to convert large sums of cash from a tax-deferred retirement account into a Roth account. Jason York/Shutterstock

If you’ve accumulated substantial retirement funds and you want to tap early into your nest egg tax- and penalty-free, you may benefit from a Roth conversion ladder.

But it can be a complex process. So let’s start with the basics.

What Is a Roth Conversion Ladder?

A Roth conversion ladder allows you to convert large sums of cash from a tax-deferred retirement account like a traditional individual retirement account (IRA) or a traditional 401(k) into a Roth account in increments over multiple years. By transferring money over several years, you create conversion “ladders.”

Why do this over time? This helps you get around certain contribution limits and tax consequences tied to Roth IRAs.

First, let’s start with contribution limits. In 2024 and 2025, you can contribute a maximum of $7,000 to a Roth IRA ($8,000 if you’re 50 or older). That may not sound like a lot, especially considering the much larger contribution limits for accounts like 401(k)s.

But conversions work a bit differently. A conversion doesn’t count toward the contribution limit in the year it was made. So you can transfer $50,000 from a traditional IRA or 401(k) into a Roth IRA without breaking any contribution limit rules. The move also won’t trigger an early withdrawal penalty.

However, it’s very important to keep in mind that the amount you’re converting from a traditional IRA or 401(k) into a Roth IRA would be taxed as ordinary income. This is because traditional IRAs and similar accounts are tax-deferred. You pay taxes when you withdraw money at retirement. In addition, these types of accounts allow for tax-deductible contributions. In other words, you can’t double dip.

However, the main upside to Roth IRAs is tax-free withdrawals. This can be especially beneficial if you expect to retire in a higher tax bracket than the one you are in now.

With that said, conversions from a traditional IRA to a Roth IRA can push you into a higher tax bracket. But this is why many investors take the Roth conversion ladder path and do it in small increments. This prevents you from taking one big tax hit for one large conversion.

To make the most out of this strategy and tap into your savings tax- and penalty-free, you need to understand the five-year rule.

What Is the 5-Year Rule?

You can withdraw both your contributions and earnings from a Roth IRA tax- and penalty-free as long as the account has been open for at least five years and you’re at least 59 1/2 years old.

But, conversions work differently. Each conversion has its own five-year waiting period. So if you converted $50,000 from a traditional IRA into a Roth IRA in 2024 and withdrew it in 2025, you’d get hit with a 10 percent early-withdrawal penalty.

This is why most advisers recommend you start your conversion at least five years before you’d need the money.

Climbing the Ladder

Let’s say you want to retire at age 50 and you believe you’d need at least $50,000 a year to live a comfortable retirement. You may start your Roth conversion ladder at age 45. So you convert $50,000 that year. The next year, you do the same. And you keep going.

By the time you reach age 50, you can withdraw $50,000 (the first conversion) tax- and penalty-free because that conversion has satisfied the five-year rule. And congratulations on your early retirement. But you keep making conversions as you build out your ladder. This could provide a steady stream of tax- and penalty-free income before reaching age 59½. But at that point, you can withdraw money from other accounts like traditional IRAs and 401(k)s penalty-free.

Backdoor Roth IRA Versus Roth Conversion Ladder

You may have also heard of a backdoor Roth IRA. This is a strategy that involves transferring nondeductible contributions from a traditional IRA into a Roth IRA in order to bypass income limits for contributing directly to a Roth IRA.

To contribute the full amount to a Roth IRA in 2024, your modified adjusted gross income must be less than $146,000 for single filers or $230,000 if you’re married and filing jointly. In 2025, your MAGI has to be less than $150,000 if you’re single or $236,000 if you’re married and filing jointly.

However, a Roth conversion ladder serves a different purpose. This process involves moving funds from a traditional IRA in increments into a Roth IRA in order to benefit from penalty-free withdrawals before reaching age 59 1/2.

When deciding how to make the most out of a Roth conversion ladder, it can behoove you to consult a qualified tax adviser.

The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.