Climbing The Roth IRA Conversion Ladder To Fund Early Retirement


I want to tell you a story about accessing tax-deferred funds in an IRA or 401k before age 59.5 without paying a penalty.  But first I’m going full out White Fang on you.

A trapped animal will do just about anything to get free.  When you get caught, normal rules of comportment and demeanor are sloughed off to make room for the demands of the primordial will to live.  It’s all about survival.  Adrenaline rushing, pumping through arteries and veins, clouding the judgment and dulling the pain, the wild animal will chew it’s own leg off to disengage itself from a trap.  It’s all about survival.

What separates man from beast is consciousness and the ability to plan for the future.  To plan for a tomorrow that’s better than today.  We are wise enough to search for traps and avoid going down paths that might be trapped.

Travel back a few years in time to our recent military conflicts and take a journey with an infantryman across the arid desert landscape cut by wadis and pockmarked with rocks.  When on patrol, the soldier avoids commonly tread footpaths because that’s where the improvised explosive devices (the dreaded IED) often lie in wait for unsuspecting soldiers.  When left with no other alternative but to pass through a choke point like an alleyway between adobe mud compounds, the soldier sweeps the ground with a metal detector to check for IEDs.  Feet and legs are important, and the utmost precautions are taken to prevent loss of life and limb.

A wild animal can’t think ahead like us higher order beasts.  When the animal is out on patrol, a well placed trap can ensnare the unsuspecting creature.  The end result is a leg caught in trap and the choice (that isn’t really a choice) to gnaw its own leg off.

A leg, from just above the knee down to the foot, is about ten percent of a human’s body weight.  Ten percent is a big number when it comes to bodily integrity or the integrity of your investment portfolio.  You don’t want your investment portfolio to lose a leg.  Your portfolio might never walk again, and at the least it’ll need crutches or other assistance to carry you through retirement.  It’s all about survival.


Early Withdrawal Penalties: How to not chop off 10% of your portfolio

Here’s one the most frequently asked questions I receive:

Hey dude, I read your awesome article on earning $150,000 per year while paying only $150 in tax.  You put over $60,000 into traditional 401ks and IRAs by maxing out those accounts each year.  But let me tell you, you’re so screwed because you have to pay a 10% penalty on top of ordinary income tax on every penny you withdraw now because you are in your thirties and nowhere near age 59.5.

The grammarians among us will quickly realize that’s not a question at all but rather a statement.  Some of the nicer readers that aren’t trying to prove the impossibility of early retirement phrase things in a Jeopardy friendly format by asking “what is your plan to access traditional IRAs and 401ks before age 59.5 without paying a 10% penalty?“.

Like a smart soldier navigating a booby-trapped route on a battlefield, it all comes down to careful planning and execution (if you want to avoid losing that ten percent).  There are two major paths that permit penalty free early withdrawals from 401ks and IRAs.

The first path, Rule 72t withdrawals (also known as Substantially Equal Periodic Payments or SEPP), will be discussed in great detail in a future post.  The ten second explanation is that it allows you to withdraw around 3-4% of your tax deferred assets each year following a strict IRS formula.  It requires a long term commitment to a rigid withdrawal scheme with severe penalties for messing up withdrawals.  In other words, it’s very difficult to deviate from the 72t withdrawal plan before reaching age 59.5, and if you do so by accident, you’ll feel the snap of the trap and lose ten percent of your withdrawals backdated to your very first 72t withdrawal (ouch!).

The second path is the Roth IRA Conversion Ladder.  It’s the plan I’m following to fund the next twenty five years of my early retirement before reaching age 59.5.


The Roth IRA Conversion Ladder

By cleverly maxing out our tax deferred savings options, we owed almost nothing in taxes every year in spite of our combined (very very low) six figure income.  It feels like we stumbled into a deep pit of tax liability.  The Roth IRA Conversion Ladder is the tool we’ll use to climb up and escape the tax pit.

But first a note on tax deferred accounts in general.  You can debate the merits of Roth versus traditional IRAs and 401ks all you want, but know that we saved well over a hundred thousand dollars in taxes by maxing out tax deferred options.  Those six figure savings were invested over the years and have grown into even more money today.  When we owe federal income taxes again (in a decade or two), we’ll have a huge war chest filled with all those tax savings over the years to pay future tax liabilities as they arise.

The basis of the Roth IRA Conversion Ladder comes from an IRS rule that allows any amounts converted from a traditional IRA to a Roth IRA to be withdrawn penalty free and tax free.  The rule comes with some catches.  The first is that you have to wait five tax years after the conversion before you can withdraw penalty free.  The second catch is that you have to pay taxes at the time of conversion.

Here’s how it works in practice.  Let’s say you convert $30,000 from your traditional IRA to a Roth IRA during 2015.  You will have $30,000 of ordinary income in 2015 due to the conversion, and might owe tax on that amount depending on your filing status and other income earned during the year.  In 2020, you can withdraw the $30,000 (but not any earnings) penalty free and tax free.  Convert another $30,000 in 2016, pay the tax (if any), then you have $30,000 to withdraw in 2021.  Convert another $30,000 in 2017, pay the tax (if any), then you have $30,000 to withdraw in 2022.  Repeat each year and you have just built a Roth IRA Conversion Ladder of your own!

Let’s take a look at an example of a Roth IRA Conversion Ladder for a 45 year old early retiree:

 Convert to Roth
Withdraw from RothAgeNotes
20203000030000505 years since 2015 conversion
20213000030000515 years since 2016 conversion
20223000030000525 years since 2017 conversion
20233000030000535 years since 2018 conversion
20243000030000545 years since 2019 conversion
20253000030000555 years since 2020 conversion
20263000030000565 years since 2021 conversion
20273000030000575 years since 2022 conversion
20283000030000585 years since 2023 conversion
20293000030000595 years since 2024 conversion
2030300003000060You're over 59.5 – do whatever



Planning for the Roth IRA Conversion Ladder

It takes a little planning to launch your Roth IRA Conversion Ladder successfully.  Take a look at that table and you might notice two problems.

First, there’s no money to provide for living expenses in years one through five.  You’ll have to cobble together five years of expenses from somewhere.  This is where it pays to have some taxable investments on hand to get you through the first five years of early retirement while you’re setting up the Roth IRA Conversion Ladder.  Leading up to early retirement, it might be necessary to back off of the tax-deferred contributions a little in order to top off a taxable portfolio that holds five years worth of expenses.

If you don’t have a sufficient amount in your taxable account, other options for funding the initial five years include:

  • withdrawing Roth IRA contributions (annual contributions can be withdrawn any time without paying tax or penalty)
  • withdrawals from a 457 account if you have one (you’ll owe tax but no penalty)
  • side hustle income from a hobby or part time job
  • proceeds from sale of a business
  • severance pay
  • unemployment payments

Just remember to balance your tax liability in the last few years of work with your tax liability in the first five years of the Roth IRA Conversion Ladder.  You might end up in the 10% or 15% bracket.  Just make sure you don’t end up in the 25% bracket some years and the 0% bracket other years.

In our case, we managed to max out all tax deferred options every year.  Eventually our incomes increased to the point where we were also saving a significant amount in our taxable accounts, too.  The taxable account should get us through at least the first ten years of early retirement, allowing us to slowly set up our Roth IRA Conversion Ladder and stay in the 0% tax bracket most of the time.

The second problem is inflation.  You can’t convert $30,000 today if you want to spend $30,000 in five years because inflation will erode the purchasing power of that $30,000.  You’ll need to convert an inflated amount today to provide for future years’ expenses.  If you want $30,000 in real terms (after inflation) in five years, you’ll need to convert around 16% extra to account for 3% annual inflation.

Instead of converting $30,000 today, you’ll need to convert $34,800 today to provide $30,000 of purchasing power in the sixth year.  Then convert $35,800 in year two to fund year seven’s expenses, and so on.

Here’s a better Roth IRA Conversion Ladder that shows expenses for the first five years while setting up the ladder and the required amounts to cover inflation:

 Convert to RothWithdraw from RothWithdraw from TaxableAgeNotes
202040300348000505 years since 2015 conversion
202141500358000515 years since 2016 conversion
202242700369000525 years since 2017 conversion
202344000380000535 years since 2018 conversion
202445300391000545 years since 2019 conversion
202546700403000555 years since 2020 conversion
202648100415000565 years since 2021 conversion
202749500427000575 years since 2022 conversion
202851000440000585 years since 2023 conversion
202952500453000595 years since 2024 conversion
20305410046700060You're over 59.5 – do whatever

In this table, the early retiree will have a consistent inflation adjusted $30,000 per year (in 2015 dollars).  Withdrawals from the taxable account total $159,300 over the first five years of the withdrawal plan.  That doesn’t mean the $159,300 has to be in the taxable account on day one, because some growth in the account is likely over the five year withdrawal period.


Taxes on the Roth IRA Conversion Ladder

Ignoring other income, a single person climbing the Roth IRA Conversion Ladder will pay $3,213 in federal income tax each year to keep the ladder going.  That’s the tax due on a $34,800 IRA conversion.  Since the standard deduction and personal exemption are indexed to inflation, the tax burden will remain $3,213 each year (in real terms).

Married couples with no children fare much better, owing only $1,420 in federal tax each year.  Throw a child in the mix and the tax burden drops to $20 (due in part to a $1,000 child tax credit).

Since we have three kids, we could convert up to $58,750 each year without paying any federal income tax.  Though we’ll probably keep our total income closer to $40,000 in order to optimize Affordable Care Act subsidies and other benefits tied to AGI as well as keep state income tax burden low.


Root of Good’s Roth IRA Conversion Ladder

So far we have dealt in hypotheticals.  Here is the real Roth IRA Conversion Ladder we plan on following:

Convert to RothWithdraw from Roth5 Yr. Roth IRA Conversion “Bank”Withdraw from TaxableAge   

Here are the assumptions to help understand our withdrawal plan:

  • Annual spending of $32,400 based on our early retirement budget, with increases for inflation each year
  • We have a $345,000 taxable account that we’ll spend down over the next 10 years.  We need 1.6% investment returns to make that last for 10 years
  • Half of the amount spent each year from the taxable account is basis, the other half capital gain or dividend income.  In other words, a $32,400 withdrawal is $16,200 return of capital (not taxed) and $16,200 income (dividends and capital gains)
  • We are aiming at $40,000 per year AGI which will produce a zero income tax bill for the next ten years, then we’ll owe $500 per year between 2025 and 2031 assuming our 2 year old is no longer a tax dependent.  After that, our taxes will rise slightly.

In a nutshell, the table shows how we’ll be able to fund 25 years of early retirement before reaching age 59.5 without ever paying a 10% early withdrawal penalty.  This plan also keeps our income taxes near zero for about half of that period and we won’t owe more than a couple thousand per year for the last ten years of the plan.

In the table I have a column labeled 5 Yr. Roth IRA Conversion “Bank”.  I made this name up but it’s a critical component to any Roth IRA Conversion Ladder.  It’s a running tally of how much 5+ year old Roth IRA conversions we have available each year.  In year 2020, we will be able to withdraw the $23,800 converted in 2015.  By 2024, the year before we plan on taking the first Roth IRA withdrawals, we’ll have $126,300 in the Five Year Roth IRA Conversion Bank.  At the end of 2025, after taking the first Roth IRA withdrawal of $43,500, we will still have $110,400 in the bank.


Breaking the (Five Year Roth IRA Conversion) Bank?

By the end of 2029, our Five Year Roth IRA Conversion Bank will bottom out at only $41,700.  That’s still almost one whole year of expenses in 2029.  I’m not worried about coming that close to emptying our Five Year Roth IRA Conversion Bank because I have a few other cards up my sleeve.

I have a 457 account with $70,000 in it today (that will probably grow to $150,000+ by 2029) that lets me withdraw funds at any time without penalty (just pay the ordinary income tax on the withdrawal).  The 457 can easily cover a multi-year Roth IRA Conversion Ladder shortfall in a pinch (with slightly sub-optimal tax impacts if amounts withdrawn are large).

We also have a Health Savings Account (HSA) with $60,000 in it today that offers tax free and penalty free withdrawals to cover any health related expenses.  Since health related expenses are the biggest unknowns for us over the next several decades, this account will come in handy to smooth out the tax impact of withdrawals if we need a little extra cash in any given year.

And finally, we have $25,000 in Roth IRA contributions from a few low income years during college and some higher income years we were ineligible for traditional IRA contributions.  I don’t want to confuse the details of the larger plan with this $25,000 of Roth IRA contributions, but know that we will technically be withdrawing this $25,000 of Roth IRA contributions in year 2025 when we make our first Roth IRA withdrawals.  The IRS has rules (don’t they always?) on the order of Roth IRA withdrawals and they state that contributions come out first, then conversions. As a result, our $41,700 low point in our Five Year Roth IRA Conversion Bank will actually be $66,700.


Finding the rungs on your own Roth IRA Conversion Ladder

Reading over this post, I realize it sounds very complicated and in depth.  Take it step by step and it isn’t that daunting a task to set up your own ladder.

1. Figure out what you’ll be spending each year in retirement.  Here’s how we developed our $32,400 per year retirement budget.  If you need to track expenses now, check out Personal Capital – it’s free and automates expense tracking for you.

2. Determine how you’ll fund the first five years of retirement while you’re setting up the ladder.  Do you have extra cash on hand or a taxable brokerage account to bridge the gap?

3. Don’t forget to account for inflation when you start the Roth conversions.  You’ll have to convert 16% more today to cover 3% inflation per year for five years.

4. Roth conversions sound scary but are pretty easy.  At Vanguard, for example, you can execute a conversion in less than five minutes on their web page.  If you need help, call your brokerage firm.  It’s a five minute task once per year task once you get your plan figured out.  And you can adjust as you go along if your plans change.

5. If you’re planning on paying for your own health insurance, consider your AGI level due to Roth Conversions in the context of the Affordable Care Act subsidies for health insurance.  The sweet spot to maximize your subsidies is in the 150-200% of the federal poverty level range (<$31k for a family of 2, <$56k for a family of 5).



If you are approaching early retirement, how do you plan on funding your expenses each year?  Or if you’re already retired early, how do you access your tax deferred savings?




  • Nice, cool to see it laid out in a year to year chart like that! When I first read your 150k zero tax post a year or so ago I didn’t have a clue what a 457b was. Now, lo and behold turns out my wife has one. She also has a 403b which is what we have been using.

    I’m not anywhere near a position to max both like you were ( maybe one day). For now we are starting small with 5-10% income while paying off debt.

    Would you put it all in 457, half and half?

    • If the 457 investment options aren’t any worse than the 403b options, then I would stick it all in the 457 for the withdrawal flexibility. Where I worked at the state, the 403b investment options were way worse than the 457 options, so I stuck with the 457 and then found out I could withdraw at any time without penalty (just pay tax on withdrawals).

    • I think this is good, but I believe that the 5 year hold on the Roth $$ only applies to earnings made in the Roth. The contribution you make INTO the Roth can be used anytime in an emergency without suffering the 10% penalty, as long as you are over the 55 age. Of course, the point is to NOT touch the contribution, but I think that clarification is important – if you needed to, you could get to the Roth $$ (the contribution part) and convert it to taxable income. I’m not a tax person, just relaying (for clarity and my own accuracy) what I’ve gleaned.

  • if you do your taxes in Feb/March, it’s nice to play around the number for the distribution in line 15a of the 1040 so you don’t inadvertently trigger a higher tax burden than you’re expecting ( I wait until the very of the end of the return and plug that number in last just to make sure it won’t mess up credits etc.) then afterwards, you can do the transaction with your financial institution.

    • Are you saying you make the Roth conversion in Feb or March for the previous tax year (ie convert in March 2015 for the 2014 tax year)? I thought it had to be done in the actual tax year.

      As far as I know the 5 year waiting period for penalty free withdrawals starts running based on the year you convert in (whether you convert on Jan 1 or Dec 31). So you could actually convert on Dec 31 2015 and take a penalty free withdrawal 4 years and a day later on Jan 1 2020 (well, you might want to wait till Jan 2 so your financial firm will be open…).

  • What a clearly presented and well thought out financial plan. I have 9 years before I can access my tax deferred accounts without paying a penalty. My assets are a mix of taxable investments and tax deferred 401K and IRAs. I have enough in my taxable accounts to fund my expenses for at least 10 years. Like you, I am able to ascertain this because I keep track of my expenses and assets, in my case, on a monthly basis.

    • It sounds like you’ll be well set to set up a conversion ladder while living on taxable investments. In our case, the taxable assets let us slowly convert to Roths and pay less tax over time.

  • Excellent plan! I wasn’t aware of the options available to access your money early, so this is very helpful information. Thanks for sharing and keep us updated!

    Any thoughts about what would happen if congress removed the roth conversion option? Wasn’t that a rule that was only recently put into place?

    • Thanks! I’ll definitely put out an updated post if or when we change the conversion ladder plan. That’s what it is today but I’m certain things will change somehow in terms of our wants or need for income, or finding new tricks along the way.

      As for the tax law changes, see my response to Vawt just below this. I think the conversion option has been in place for a while, and even if they put a stop to it, the ladder will still provide 5 years to adjust to changes (assuming they continue to let you withdraw conversion amounts after 5 years, which is basically treating conversions like contributions).

      If they make the Roth IRA conversion ladder impossible, there’s always the 72t SEPP option that can achieve the same result with less flexibility.

  • I will probably point some people your way to read this article. It is hard to explain a Roth conversion ladder without seeing it on paper (at least for some that are visual learners). I hope that I will be doing the same thing in 6+ years. I am still putting funds directly into our Roth right now, too. That makes up (hopefully) for having way less in my taxable accounts.

    Let’s hope there are not any tax law changes to this process in the next 15-20 years!

    • Point em over here! I’ve been meaning to write this article for 18 months and finally sat down for almost a whole day to bang it out. I never felt fully comfortable with any other Roth IRA conversion ladder posts I’ve seen since they tend to leave out the inflation aspect or the difficulty of the initial 5 year gap where you have to have “outside” money.

      And I wanted to actually make sure my conceptual grasp on the IRA conversion ladder penciled out to a plan that works since I never actually fleshed it out in detail before retiring. 🙂 I always knew we could make it work somehow.

      As for taxes, anything can happen. The good news is that I think the Roth IRA conversion ladder is a fairly rare little trick that most people don’t use. The very early ER world is so small that it’s not on the policymakers’ radar. And hey, we’re converting assets and theoretically paying tax on the conversions sooner, so yay! for the Treasury getting some money sooner.

  • Great article – have been reading about this for a while, but the table with examples really helps. ONe thing though – kind of disappointing you gloss over the 457. I Have one as well, and as far as I can tell, it’s the ideal early retirement account – so much so that if I were 3 or so years away from retiring, I’d considering jumping to a job that had one just so I could load it up with funds before I retire and not have to draw down my taxable income stash. 457 could also be a good idea for a person early in FI – they could take a gov job early on, load it up for 3-5 years, then jump to private sector for a while while 457 grows & use that as the conversion ladder bridge later on.

    Just some thoughts.

    • Great point on the 457. I figured most don’t have access to one, but if you do, definitely take advantage of it. We had a 401k and a 457 plan at the state and could max out both. But if you can only max 1, do the 457 (assuming investment options are similar). It’s a great feeling knowing I have ~2 years expenses sitting there just in case.

      A word of caution though – if you’re pulling from a 457 for those 5 post retirement years while setting up the conversion ladder, you’ll be adding your 457 income to the conversion income. If you spend $30k/yr from the 457, and convert the $35k or so for the Roth ladder, you’ll end up with $65k income and a big tax bill (well bigger than zero 😉 ).

  • Justin,

    This post has great timing as we are trying to figure out the best way for an Roth IRA Conversion Ladder once I’m retired while still having a single income of ~$50K.

    I have about 6-10 yrs before we hit our $2MM number and after that my wife will continue to work while I’m retired. My wife is a kindergarten teacher and she wants to work another 10+ years past my retirement date.

    Our thinking is to have her max out the 403B/457 to lower our stated income + contribute to Trad IRA’s to cut the income to minimum while living off our taxable accounts – then convert our IRA’s right up to the 15% ($74.5K 2015) limit to maximize the amount we can transfer without triggering the 25%.

    Perhaps you could post on the best way to save $$$ ( w charts) by doing a conversion w/ 1 working spouse as many of your readers will likely have 1 working /1 retired spouse similar to

    Thanks for all the great posts!

    • I think your plan makes a lot of sense. If you’re planning on being in the 15% bracket in retirement anyway (by pulling from 457 and/or continuing the Roth IRA conversion ladder), you’ll come out about the same tax-wise. Having more assets in your 5 Yr Roth Conversion Bank will also let you game your AGI post retirement in order to qualify for ACA subsidies (assuming your wife won’t have free/cheap family health insurance). I think the AGI cut off for a married couple with no kids is around $60-63k, so you can probably squeeze in under the AGI threshold to pick up some subsidies.

  • Thanks for the post. I never considered inflation when considering this method. At the end of the day, the bottom line is that you need to have 5 years of expenses saved and ready to utilize if you want to live off a Roth conversion ladder. I guess you could just go semi-retired and rely on a part-time job for the living expenses during that 5 year span. Either way, the arrow still points to saving as much as you can in tax-deferred accounts early on because of the ability to use the Roth ladder later to control the tax you pay, if any.

    • That’s pretty much the case. You have to figure out how exactly you’re funding that initial 5 year gap. And unfortunately any part time job income during those 5 years will be added on top of your conversion amounts, so you might push your marginal rate up, which is why it’s a balancing act with your marginal rate the last few years of working.

  • Could you add a discussion on how the ACA changes tax and income considerations for this plan?

    • I’ll have to work up that article at some point, because it definitely impacts our conversion ladder planning to some extent. In essence, the ACA acts as an implicit 15-18% marginal tax rate. So every extra dollar you convert to Roth, you’re paying an extra 15% or so on top of any federal income tax you pay. Which means even if you’re in the 0% tax bracket, you might not want to go crazy converting way more than you might reasonably need.

  • Great well thought out post Justin! I always cringe when I see those naysayers criticizing from their keyboards:

    “Hey dummy! You can’t touch that money until you’re 59.5” or “Have fun paying a 10% penalty on top of your ordinary income taxes!”

    I knew about both options but didn’t know how tricky the 72(t) was. Thanks for clarifying!

  • I had been converting my IRA and Husband IRA to Roth, since we are both retired at age 45 and 49. My purpose is to avoid RMD and a free inheratance. By doing the number on my IRA balance today I will be in a very high RMD at age 70.5 probably higher than 25% on taxes. Do you think is a good idea to even convert larger amount even is I have to pay a 25% on income tax.

    • If you can convert up to the 15% bracket each year from now until age 70.5 (that’s 20-25 years), would you get your traditional IRA balance low enough to avoid paying 25%+ taxes once you are taking RMD’s? It might make sense to try to keep yourself out of the 25% bracket by starting conversions now, and if that will still leave you in the 28%+ brackets once RMDs hit, then you might convert more now (even if it puts you in the 25% bracket today).

      It looks like the 15% bracket is up to about $95,000 income per year, and the 25% bracket goes up to about $160,000. So there’s a lot of room to convert for the next 20-25 years and literally move millions of dollars to Roth IRAs.

  • I have never been a proponent of the Roth system because I believed the government will eventually find a way to screw over those who used it. But now that I am ER, I can see the wisdom of your approach, particularly since I am no longer paying high taxes from work. I will have to give some serious thought to this since we have enough from our other accounts to pay our way for the five years needed. Appreciate the time it took you to write this well thought out missive.

    • It’s a great way to access funds before 59.5, that’s for sure! We shied away from Roths while working so we could take the immediate tax break. But now they are a great tool in retirement.

  • I’ve read probably 15-20 articles on this topic, and it finally makes sense. Either you are a better teacher than most, or I’m just a bit denser. Either way, thanks!

    I must say, like Dave, if I ever engage in this strategy, I will probably wait towards the end of the year to make sure I don’t accidentally make too much money and trigger infinity taxes! The conversion seems to work best if you commit to at least a few consecutive years of low/no income.

    • Well, great! Glad I could help.

      We’ll probably wait till the end of the year too so we can see how much other income we get. Most of our funds pay dividends in December so we won’t know what we’re getting until the last week of the year usually.

  • We’re still a few years out, but have been playing around with the idea of the Roth ladder in lieu of the 72t distributions recently. Both are possibilities for us, but we also hope to have enough in taxable and real estate investments to last us for the bulk of our pre-age 60 years.

    Also – how the heck do you have $60K in an HSA! Holy moly! How long have you had that thing…. we’re limited to putting ~$3K in ours each year and the investment selection isn’t great.

    • That’s a great position to be in to not have to worry about withdrawing from retirement accounts before 60!

      As for the HSA, we’ve had it for most of the last 8-9 years and maxed it out each year (there might be a year or two we didn’t have a HDHP and couldn’t contribute). We happened to fill this account up with small cap value and international REITs, and I think those asset classes have done pretty well since the 08-09 crash, which might explain the growth. Personal Capital says we’re up a little over 20% since 2 years ago. We’re also lucky to have the HSA at fidelity where we have access to pretty much any investment in the world (except maybe options??).

  • The level of detail here is really great. I get tired of list posts that lack substance (not by you). I’m looking forward to working this strategy as well in the future. It will probably be a bit easier as well since I currently contribute to a ROTH since I’m priced out of a regular 401k.

    • Thanks for the kind words, I’ll pass them on to the writing team. 😉

      And I assume you mean priced out of a traditional IRA and forced into a Roth, right?

  • Really enjoyed the article. Just one quick question about the charts.

    Wouldn’t it be in your best interest to stop converting to the Roth at age 55? Any money converted after 55 wouldn’t be eligible for tax free withdrawal until after you turn 60, at which point you can withdraw it tax free anyway. This way you avoid having the conversions count as taxable income in years 55-60.

    • You should at least use up the 0% tax bracket in general. That’s about $20,000 per year for a married filing jointly couple. I don’t think that level of AGI would cause you to lose out on ACA health insurance subsidies or anything else.

      But yes, there’s technically no benefit in terms of avoiding a 10% early withdrawal penalty by converting at age 55+. I hesitated to show conversions for those years, but for most people it’ll make sense to keep on converting to get as much into the Roth space as possible (while managing their tax liability).

  • This is really helpful and thank you for spending the time to do this. I believe you have some of the best tax saving articles. I’ve gone back to your 0 income tax post at least 10 times now :). thanks again.

  • This is a great fresh write up on the Roth conversion ladder and I love that you included your actual projections, it makes it feel like much more of a reality. It’ll be interesting when you report on the ongoing process.

    I did have a question on your tables. You stop at age 60 and say “do whatever”. I think I understand that you are inferring the early withdrawal penalty is no longer in effect at this point. But, my understanding of the conversion strategy is to keep doing it at a tax free level until you’ve drawn it all down. That way, it’s tax free forever: on the contribution, the conversion, and the withdrawal. If you stopped at 60 and took normal distributions, it would be subject to regular income tax. The ROTH would be tax free for good. Am I missing something?

    • Yeah, “do whatever” is shorthand for you have unlimited flexibility to withdraw from any account you want without penalty (except HSA which only allows withdrawal for non-medical purposes without penalty AFTER age 65, not 59.5).

      As far as continuing to convert to Roth after age 60, it may not really matter. Withdrawing $30k from a traditional IRA and spending it is the exact same as converting $30k from trad IRA to Roth then withdrawing $30k from the Roth to spend (you’re in the same position with or without the conversion step).

      But yes, if you have space in the 0% bracket or the 10% bracket and want to optimize your taxes, it might make sense to keep on converting. Otherwise you might face a huge tax bill once you hit age 70.5 with RMDs. If we end up with a few million (in 2015 dollars) left in our trad. IRAs at age 70.5, we’ll be facing RMDs at around $100k per year. That would push us to the top of the 15% bracket and maybe into the 25% bracket, so we would be smart to ramp up the Roth conversions in our 50’s and 60’s (or even earlier) in an attempt to keep ourselves in the 10% or 15% bracket as much as possible. Think of it as “tax smoothing” if you will.

  • Thanks for breaking the conversion process down. When you convert your IRA into a Roth do you have to sell your stocks in the IRA and then re-buy for the Roth? Or do you just slide over a $30K chunk without having to actually sell? I’m assuming you will re-invest in something while you’re waiting to spend the Roth bank. Also, I’m linking to an article from a Roth conversion skeptic. I don’t expect you to read it since you have limited time, but I just want to add it because I’m trying to figure out if this conversion process is really the right way to go or is just adding complexity (and I might be a little dense like Hanna too, haha):

    • The actual process of the conversion is very straightforward, at least at Vanguard. I just put in a conversion order but canceled it before hitting “submit” and it took about 2 minutes. You go online and execute an exchange from a traditional IRA to a Roth IRA. Vanguard pops up a warning that you’re doing a conversion, there are tax implications, etc. Click through, pick whether you want taxes withheld (probably not!) then hit submit. I’ve heard other brokerages make it similarly easy to execute a conversion online by “sliding” a $30k chunk over without actually buying and selling.

      As for the the link and the added complexity, I don’t really see it as being a particularly complex transaction. The conversion itself is incredibly simple (at Vanguard, it’s no harder than buying a mutual fund or exchanging from one fund to another fund within the same account). The hardest part is figuring out how much you want to convert, and I hope I’ve illustrated how much you should plan on converting to satisfy your spending needs 5 years out to get the ladder established.

      Tax wise, it’s an entry on line 15 to show the conversion as income, and I think you put a quick explanatory note in with your tax return (that’s how I do it when filing on paper). It’s common enough that I bet turbo tax or similar programs handle it flawlessly.

      Given the hundreds of thousands we have today due to a decade of aggressive tax savings, I’d say it’s well worth it to max out traditional IRAs and 401ks, then plan on slowly trickling that money out through a Roth IRA conversion ladder in order to manage your tax burden in retirement. We were saving taxes at the 15-25% bracket every year while working, and now we’ll be in the zero bracket for a while before dipping into the 10% bracket and maybe eventually the 15% bracket very slightly.

      I think the article has a good point that Roth’s aren’t as awesome as some claim while working (if you have access to traditional IRAs). However in retirement, Roth conversions are a great way to access the tax deferred funds without paying a penalty. And you do decrease the amounts subject to RMDs eventually. The author in that article stated he could increase his net worth from 2-10% depending on the calculator used but it’s not worth it for the complexity. I’ll take $30,000 to $300,000 added to my net worth any day just for clicking a few buttons at vanguard, maintaining a spreadsheet (which I pulled together for this article 🙂 ), and adding a number on a line on my tax form (which will already have a number if you withdraw from a traditional IRA after age 59.5). To each their own though – Roths and Roth Conversions won’t be appropriate to every investor and it really depends on where your assets are situated in terms of taxable, tax deferred or Roth.

      (wow, that was a long comment response!)

      • Yeah, I think the article didn’t consider the need to access funds prior to 59.5 years old. There is tremendous value to this strategy during that time of early withdrawal penalty.

        • It’s a pretty big issue if the article is aimed at early retirees because the ability to spend your retirement assets before age 59.5 is one of the biggest hurdles to overcome, and it prevents a lot of people from contributing to tax advantaged retirement accounts altogether, to their great tax liability detriment (many tens or even hundreds of thousands of dollars over a lifetime).

      • That was an awesome, long comment. Thanks for sharing so much. The benefits are starting to make a little more sense. I’m retiring this year but our situations are a little different. I have about about 85% of my nest egg in taxable accounts (I was making more money investing on my own than through the limited, poorly performing 401K mutual fund options) and 15% in an IRA. So, I won’t need to tap into IRA funds to live on. I also don’t have a pension heading my way so I won’t have to worry about RMDs along with a pension pushing me into a higher bracket. That being said, I decided to run one of the Roth conversion calculators and various scenarios showed that a conversion would lead to 0 to 27 extra dollars per month for me. As far as complexity goes, my lady friend of 25 years (also FI) and I are calculating the benefits/cost of getting married and all it entails (spousal SS benefits, marriage penalty or windfall, etc.) Romantic, huh? So my whole situation could change and I will need to evaluate the whole IRA conversion topic again.
        Here’s the IRA conversion calculator, for those who want to see if conversion is worthwhile:

        • With that much in taxable accounts, any impact from Roth conversions will be pretty small.

          Add in spousal financial considerations, it could change the Roth conversion picture.

  • Very cool illustration of the Roth IRA Conversion strategy.

    So is 2015 your first year initiating this strategy?

    I guess the only risk is that the government changes the rules before you complete your conversion. But no reason to worry about something that is out of your control.


    • Depending on whether Mrs. RoG quits in 2015 or 2016. If 2015, then yes, we’ll start converting some amounts now assuming we have room without getting the AGI too high.

      As for future tax changes, I’m not too worried. I talked about tax changes in a couple of earlier comments here, but to summarize, we’ll have 5 years to adjust course if they eliminate the ability to convert from trad. to Roth. And there’s always the 72t SEPP option to access retirement funds.

  • Have you looked into using the Horse Race Strategy on your Roth conversions? Mad Fientist had an article on it:

    Basically just converting to two different assets, and whichever one does better you keep as the Roth conversion. The other one you can recharacterize if it goes down, that way you don’t pay for a $10k conversion when it is down to $8k or something.

    • I’m aware of it, and might end up using it if it’s easy enough to implement. If I did the horse race with, say, large cap US as one fund and total international with the other fund, it looks like they have about a 10% difference in performance most years. So on a $35,000 conversion, I could maybe squeeze an extra $3500 profit into the Roth by using the Horse Race strategy. That’s $500 in tax savings on the extra amount (in the 15% bracket). Probably worth clicking a few buttons twice a year.

  • Just remember to balance your tax liability in the last few years of work with your tax liability in the first five years of the Roth IRA Conversion Ladder. You might end up in the 10% or 15% bracket. Just make sure you don’t end up in the 25% bracket some years and the 0% bracket other years.

    Can you provide an example, not sure if I follow entirely. Thanks.

    • Don’t max out all your tax deferred accounts in the last few years of working just to get down to 0% bracket or 10% bracket and then go on to year 1 of starting your Roth IRA conversion ladder and have to make enough money to live on (part time/side hustle income, cap gains, etc) plus having to convert even more money to fund the first rung of the IRA ladder.

      As an example, don’t max out all your tax deferred accounts to get your married AGI down to $30k your last year of working to stay in the middle of the 10% bracket then end up in the middle of the 15% bracket if you convert $40k to Roth and withdraw another $35k from a 457 (for a total AGI of $75k).

      Better to skip about $8k of tax deferred contributions in the last year of work to use up the 10% bracket, then have a little less income the 1st year of early retirement (reducing the amount subject to 15% tax).

      • I think I follow this time. Because you are saying that 8K in your example would be saved up in year 1 to be used as income, instead of tax deferral. If that’s not it, I probably need a drawing to help me out, ha thanks for explaining.

  • Very useful post……. very well articulated! Thanks for sharing this useful knowledge 🙂

    I may not be using all this information in near future as I plan to work for few more years. But have made a note to implement this in future !!!

  • I am a full time dad (36) with our baby after years of working and great savings as have good amount in 401k plans and some in Roth IRA. My wife (36) is a teacher and I found out they have 457 plan offer with 403b. She just stop her 403b after 5 years so we can do Roth IRA and been doing that for last couple months.
    Is it pointless to do 457 plan if we already are putting the money in Roth IRA? As Roth IRA can withdraw without penalty on the contribution before 59 1/2 anyway. We plan to be FI at the age of 45.

    • You’ll have to run the math on the tax difference between 457 and Roth contributions and withdrawals. Most people end up in a lower tax bracket in retirement, so you might be able to save 15-25% federal tax on the 457 contribs while working and pay zero or 10% while retired when you withdraw.

  • Wow – I have been reading finance articles and blogs for a while & haven’t seen the ROTH conversion ladder before. I love it and you did a great job of explaining it in detail. One Question: Do you still have a mortgage? $32k a year and a family sounds like scorched earth if you have a mortgage to pay each month

    • Mortgage has about $28k left and under 2 years, so I don’t count that in the $32k budget since we can pay it off any time with cash on hand or by selling a tiny bit of the portfolio.

  • This was a really nice explanation of how to do the Roth Conversion ladder. I have learned a lot from your site, including the existence of a 457 plan, which in some cases could be used in conjunction with a 401 K. My plan is to one day follow a similar path with my tax-deferred 401K/IRA contributions. The only concern I have is if some day the rules of the game change, and conversions from IRA to ROTH IRA are not allowed. However, since congress needs cash, they want to encourage people to Rothify today, since many will not follow the Root of Good calculations, and would actually end up paying tax on conversions.

    Best Regards,

    Dividend Growth Investor

    • I agree – Congress probably looks at this as a way to accelerate tax payments, so probably not likely to kill the program. Maybe limit it to something like $100k per year or similar amount so the middle class can still survive but screw the really wealthy fat cats (who actually pay the taxes…). 🙂

      • I know your comment about the rich paying most of the taxes was said with a wink and a smile. I really don’t want to create a flame war in such a great forum but I want to add that the rich pay about the same in taxes as everyone else as a percentage of income (considering payroll, state, local and fed taxes). It’s a common misconception that the rich are getting soaked:

        Feel free to delete this post if it causes any trouble!

        • I’ll leave the post up! 🙂

          I was really referring to the fact that the rich pay a higher percentage of federal income tax (almost double the middle income people) and the top 1% pay around a quarter of all federal income taxes per your link.

          Add in the regressive sales tax and sin taxes and the relatively flat rate state taxes and the regressive payroll taxes and you get the result you suggest – rich and poor aren’t as far apart as we’d like to think.

  • Good information with valuable strategies for anyone to implement. IT helps to see the examples between hypothetical and real case situations as you listed above. I think your in a great position no matter if you have to pay a few thousand in taxes. It seems like your funds will grow and that growth will be more than you pay in taxes every year, so there’s no need to worry from what I see.

    • I keep forgetting that $0 tax is ideal, but I can pull an extra $20-30k into the conversion ladder for only a few thousand $ per year in extra tax or loss of ACA subsidy.

  • Does the 5 year rule only apply to conversions from a Trad. IRA to a Roth? So money contributed directly to the Roth is still subject a penalty for a withdrawal before age 59.5.

    • Good news! Contributions to the Roth IRA can be withdrawn without tax or penalty at any time. There is no 5 year waiting period for withdrawing direct contributions to the Roth IRA.

      • Thanks, this seems to good to be true. Did they just change the rule so you don’t have to wait until 59.5 for the Roth?

        • It’s been that way as long as I can remember. That’s always been one of the selling points of a Roth. You can contribute the $5500 and if you ever need it back, you can withdraw it at any time without a penalty.

          • Curious, does Social Security Disability Income apply to the tax brackets when doing the conversion or 479 plan? Or SS/SSDI doesn’t count against you regardless?

            • If you earn more than a certain amount, you’ll have to include some or all of the SS disability income in your AGI which will push you up the tax brackets. I’m not too familiar with the specifics of when the disability income becomes taxable though.

          • Cool, thanks

  • Hi Mr. Good,

    Another great article, thanks for writing it!

    I do have a question about this strategy, and something I read recently on forbes, see the example below..

    “For example: If a person has $45,000 in a Rollover IRA (untaxed money) and then attempts to utilize the strategy above to avoid income limitations on a Roth contribution by making a $5,000 non-deductible contribution to a Traditional IRA and then converting that account to a Roth IRA, the IRS will calculate that he owes taxes on an additional $4,500 of income – since it will look at the $50,000 in total non-Roth IRA money as it were one account, and since 90% of that balance (i.e., $45,000) is untaxed he owes taxes on 90% of the conversion amount of $5,000 (i.e., $4,500). Furthermore, after paying taxes on the $4,500 the converter will need to track that he has $4,500 of already-taxed non-Rollover money in his Rollover IRA account – which will not only complicate matters from an accounting perspective for years to come, but may also prevent him from rolling the money into an employer’s 401(k) plan in the future.”


    Am I correct in thinking that because your taxable income in retirement is low, that the amount of tax you pay on this will be very low as well?

    • I’m not well versed in the tax rules for rolling a non-deductible IRA contribution into a Roth, but that quote seems to get it right from what I remember.

      As far as taxes, yes, you’re right. If you convert the $5000 and only $4500 is taxable, you would be paying taxes at your lower tax rate in retirement on that $4500.

      It might make sense to skip the non-deductible IRA contribution altogether if you’re only a few years away from retirement. Keep it in cash to fund the first 5 years of retirement so you can get your ladder going.

  • I enjoyed your post. What are your plans to fund your retirement after 60?

    • Assuming we have plenty of funds remaining, we’ll be pulling from traditional IRAs probably. Hopefully we can get the traditional IRA bucket low enough by age 70 to avoid huge RMDs and the resulting massive tax bills. We’ll likely postpone social security to age 70 so it’ll grow too. SS at age 70 will be almost enough to fund our retirement budget.

      • How much can you expect to get from SS if you don’t work (and pay into SS) from age 33 to age 70?

        • About $10,000 per year for each of us (in 2015 dollars) at age 67. Maybe $13,000 if we wait till age 70 to collect.

          $26,000/yr is almost enough to fund our current $32,400 budget (which includes the cost of 3 kids), though I bet a lot will change in the next 35 years. 🙂

  • Nice writeup, Justin. I have a question regarding the 10% early withdrawal penalty. As an alternative to converting to a Roth IRA, I could pay the penalty. However, if I withdrew an amount low enough to accommodate the penalty, my taxes would end up being zero, correct?

    Let me use an example to clarify. Example uses the 2015 tax bracket for Married Individuals Filing Joint Returns which is $12,600. Personal exemptions for two people would be $4,000 each. Total amount would be $20,600. Therefore, I could withdraw 18,500 from my traditional IRA which would be counted as ordinary income. In this example, assume no other income. The 10% penalty would make the total of $20,350 (18,500 * 1.1) which would be under $20,600.

    Does my question make any sense? Thanks very much.

    • I ran through the 1040 form and it looks like the 10% early withdrawal penalty applies after all the tax is calculated and all credits are applied. In other words, you’ll likely owe the 10% penalty even if you owe zero tax and have more room in the 0% bracket and have extra credits that go unused. Refundable tax credits like the EITC and Additional Child Tax credit could be used to offset the 10% early withdrawal penalty, of course you could just take those refundable credits in the form of sweet sweet cash.

      Good idea though – I had to check it out but don’t think it’ll work unfortunately.

  • I like the detailed way you presented this information and the “losing your leg” analogy. My wife and I are in the process of saving as much as we can in our taxable accounts/CDs since we’re only 3 years away from early retirement. Between selling an investment property (est. around $100k) and what we are able to save, we should have enough to buy our home and a stash to last for 5 years until we can tap into the roth conversion ladder.

    • Good to hear! Covering that first five year gap is often the tricky part with the Roth IRA conversion ladder but you have it covered it sounds like.

      • Thanks for the great post, really nice to see it on paper, as a real life example. One thing that I think has already been mentioned, but would love to know more about is how ACA health insurance is playing a role in all of this. And what kind of costs are associated, as I know you are trying to stay in the 40k range, to keep your health costs low.

        We are currently looking into doing what you describe, but I am still trying to nail down the health care subsidies/costs, as well as how much I can convert.

        Thanks again, great info!

        • Check out this post on the ACA subsidies. It’s all laid out how AGI impacts the various subsidies and what the AGI cut offs are. I’ll have to add a link to the ACA article in the Roth ladder article since they are intertwined strategies.

          • awesome, thanks. One other question. My situation is a little different, in that I most likely will pre-retire/work part time while I let my retirement account grow until the point I need to began withdrawing, or get tired of part time work. Knowing that, would you think it’s best to try to get my tIRA (401k work plan rollover) converted to Roth sooner rather than later? My income will be lower (40k ish) during part time work, but it most likely will be lower once I’m officially retired.

            Based on income/taxes alone, it seems to make sense to wait and do the conversion when I can get income at it’s lowest point. But, I won’t ever have much in after tax accounts, it will mostly always exist in tax advantaged accounts. I am just wondering if there are any other things to consider other than taxes when doing the conversion.

            It may just be as simple as roll it over as I can, on years where my income is lowest.

            • I would wait to start the Roth conversions until you’re working part time at least. That part time work will provide most (all?) of what you need to live on, then just convert to tIRA while working part time in amounts necessary to establish your ladder (assuming you won’t have taxable investments to rely on).

  • I just read that the Roth conversions do not count toward MAGI, so I can do them during my pre-retirement/part time work and not have it affect my ACA subsidies.

  • Excellent write-up Justin and thank you very much.

    I had to go through forms 8606 and 5329 for myself to convince myself that distributions wouldn’t have to satisfy the substantial equal periodic payment (SEPP) rules….

    IRS Form 8606, line 23 instructions “Generally, there is an additional 10% tax on 2014 distributions from a Roth IRA that are shown on line 23. The additional tax is figured on Form 5329”

    The basis for conversions are treated separately on line 24, so I had to fill out both forms to convince myself….

    Year 2020’s form 8606, using your first 30k/year ladder example for a 45 yo, will have:

    Line 19 Total Nonqualified distributions $30,000
    Line 21 $30,000
    Line 22 Basis in Roth IRA *contributions* $0
    Line 23 $30,000
    Line 24 Basis in *conversions* $30,000
    Line 25 Taxable amount $0

    Line 23 directs you to form 8606. The instructions for line 1 reads: “Distributions from Roth IRAs. If you received an early distribution from your Roth IRAs, include on line 1 the part of the distribution that you must include in your income. You will find this amount on line 25 of your 2014 Form 8606”.

    So $0 in 2020 is indeed subject to the 10% penalty.

    The reason I doubted you was that even the “experts” appear to be confused on the issue…. from Fidelity’s Roth Conversion Checklist page:

    “A distribution from a Roth IRA is tax-free and penalty-free provided that the five-year aging requirement has been satisfied and at least one of the following conditions has been met: you reach age 59½, die, become disabled, or make a qualified first-time home purchase.”

    …which is just not true!

    Thank you very much indeed – indispensable information and very well presented.

    • Thanks! Glad it was helpful, and I’m even more glad that the info I put out matches what you see in the tax forms. I, too, run through the forms like you did when I need to double check that advice is accurate.

  • I have long lamented the notion of not having access to funds from my retirement accounts until after a specific age (59.5 or 60). I read a lot of stuff regarding investing and retirement so I was loosely aware of the 72t capabilities for pulling money out of retirement accounts penalty free. It wasn’t until I read your article that I began to understand the tax strategy of converting monies from a tradition/rollover IRA to a Roth IRA. Converting the funds while keeping aware of your respective tax bracket to keep the current tax rate as low as possible…while helping to reduce the likelihood of encountering excessive tax hits with RMD’s (based on the reduced balance of the tradition/rollover IRA)….while still getting to retire early. Did I get that right? 🙂 Thank you so much for opening my eyes to this approach!

    • Yes, that’s the basic summary of this Roth IRA Conversion Ladder approach to withdrawing from retirement accounts early. Glad you’re learning about this option!

  • WOW powerful tool. Thanks for sharing!

  • Justin,

    Since only conversions and not earnings can be withdrawn after five years, do you just leave all earnings in the Roth brokerage account and access them without penalty or tax after age 59.5? Do you keep track of earnings separately from your conversions?

    • That’s the plan. Contributions and conversions will come out pre-59.5 and earnings will come out after 59.5.

      Yes, you have to keep track of earnings separately from conversions.

      In practice, there’s 3 pots of money you have to keep track of for Roths.
      1. Contributions (can withdraw any time).
      2. Conversions (can be withdrawn after 5 year period)
      3. Earnings (can be withdrawn after 59.5)

      Contributions and conversions are easy to track since it’s usually 1 or just a few per year per person. Earnings is everything else above the contributions and conversion amounts.

      • When you say “keep track of earnings separately from conversions,” that doesn’t mean that you have to create separate accounts from them in your brokerage, does it? You’re just tracking the amounts somewhere like on a spreadsheet?

        Also, earnings include capital gains, too, right? So does that mean if you sell a security that you’ve converted to your Roth IRA five years ago, and it has appreciated in value since then, you can only withdraw the amount of money equal to what it was worth at the time of conversion five years ago?

        • No, you don’t need to separate earnings in different accounts within the IRA. Just on a spreadsheet. You really only have to track conversions and contributions, since earnings are “everything else”.

          Earnings are any growth above the initial amount converted/contributed. Transactions within the IRA don’t matter. In other words, if contribute $5000 in an IRA and then you have $7000 2 years later, you have a $5000 contribution and $2000 in earnings regardless of what you bought or sold within the portfolio, how much you received in dividends or capital gains distributions, and what the realized capital gains from any sales might be.

          • Got it. Thanks, Justin.

            One more question: I’ve contributed some AFTER TAX money to my TRADITIONAl IRA the last few years. I can look up the exact amounts on my past years’ 8606 forms.

            When I roll money from my Traditional IRA to my Roth IRA, how is this post tax money handled?

            • The amount of $ you contributed after tax can be converted to a Roth and you won’t owe tax on it. Any gains on the amount contributed after tax will incur tax. So if you put in $10,000 after tax and it’s grown to $15,000 today, then you would convert to the Roth $10,000 tax free (the original after tax contribution) and would convert $5000 (the gains) and owe tax on it.

  • apart from starting to roll stuff over 5 years in advance are there any other prerequisites to do this? like, do any of the accounts mentioned have to have been open or active a set amount of time prior to starting this or can you just decide one day to open up both ira accounts and start rolling over? i’m also a little unclear on how you interact with your 401(k) for this – do you roll your entire 401(k) over into the ira to start or do/can you do that incrementally in the same way you do the trad->roth ira conversion? also also (sorry, and this is probably a silly question) a spouse can’t roll over into your existing ira accounts, right? they’d have to make their own?

    • Accounts don’t have to be open for any length of time. You could open a traditional IRA and roll it to a Roth that day (or maybe the next). Though skip the traditional and contribute straight to the Roth in that case. 🙂 The backdoor Roth is basically what I just described, except to a non-deductible traditional IRA with an immediate conversion to Roth.

      As for the mechanics of rolling a 401k into a roth IRA, you should be able to do it in smaller increments each year or quarter.

      You can’t have a spouse roll their IRA into yours or vice-versa. It’s strictly on an individual basis, even for married couples.

      • My challenge is that most of my savings are in 401k / tax advantaged accounts, so when I retire I want to do roth conversions, but with them counting toward my income it kills my ACA subsidies that I was planning to get. So, either I have to live on 30k instead of 40k and convert a small amount of 10k/year which most likely won’t get me where I need to be fast enough.

        or, I need to stop saving into 401k for a few years and save as much after tax money as I can so that I can live off of that for the first few years while I do conversions.

        Do you see any other options / suggestions?

        • Those are pretty much the options. Or some hybrid of the two approaches – cut back some on 401k contributions the last few years of working to get enough to live on the first five years (if the numbers work out).

          Don’t forget, if you have a taxable brokerage account, you can sell lightly appreciated shares to free up cash for living expenses and the minimal appreciation on those sold shares means you won’t have a lot of cap gains (therefore income for ACA purposes). Do that and you can convert more to Roth each year.

          The good news is you have time to plan an optimal approach to this issue so you can make those first five years work for you and smooth out the taxes over this period.

  • It seems worth mentioning there are income limits on traditional IRAs if you want the most tax benefit from this plan.

  • Justin, great article! A few questions for you. I appreciate your time!

    1) In your first table where you’re converting $30K to Roth each year… does it matter if this $30K coming from the Traditional IRA has a mixture of contribution and earnings?

    2) You touched on your HSA a few times. I’m 30, male, and have never had any health issues or need for doctor visits outside of routine checkups. I assume I should be taking advantage of this despite having to take on a HDHP.

    3) Based on the IRA RMD worksheet I’ve seen, you take your traditional IRA balance at age 70 and divide by a number called a distribution period (which I see is 27.4). So for example, if my traditional IRA balance at gae 70 is $2M, my RMD would be $72,992. Is this correct?

    4) Did you do the backdoor roth each year or was your combined income within the MAGI limit for traditional IRA deductions? I am beyond the traditional IRA deduction limit, and will be beyond the roth IRA contribution limit next year as well. I am currently maxing out my 401K. So, I believe my best course of action will be to move my current traditional IRA balance to my 401K so I can then make non-deductible contributions to a traditional IRA and convert to roth. Can you clarify if I have this right and if it sounds optimal?

    • Regarding 4) I read some of your other insightful articles and learned you were indeed below the MAGI limit for traditional IRA deductions. Makes sense! If you don’t mind giving your thoughts on my situation that would be great!

  • Hi, Justin,

    It’s looking more and more like my FIRE date will be this year. So I’m starting to look into planning my drawdown.

    I’ve read quite a few great blogs, especially yours, about tapping into one’s retirement accounts for RE. What I’d like to know, though, is how exactly one goes about converting funds. Do I just call my brokerage’s customer service and tell them I’d like to move money from my traditional IRA to my Roth IRA? Do I need to sell the shares in my tIRA first and then move cash to my Roth, or can I move shares over without liquidating first?

    • You can almost always move funds/shares directly from tIRA to Roth without selling. The mechanics vary by brokerage firm. I believe at Vanguard you can do the transaction online (“exchange” shares from tIRA to Roth). It’s worth a call to customer service to verify the process at your brokerage firm. They might require a letter of instruction stating you intend to do a conversion.

  • Great article Justin, just got back to rereading closely as I explore some of my options in more depth.

    If you have a prior employers 401k that was rolled into a traditional IRA, do you see any advantages to possibly starting the 5 years of laddering during your working years?

    The downside is that you will incur a sizable tax bills for conversions during those years, but the possible upside is that it makes available a large chunk of tax free money immediately when you retire.

    I’m also thinking there might be some benefits as far as the ACA goes. Once you retire then year one you will have access to a bunch of money – withdrawn Roth contibutions – that doesn’t (if I’m understanding correctly) count against income eligibility for insurance premiums.

    Please, pick holes in my thoughts:)

    • Hi Steven,
      you laid out the pros and cons correctly. Ofcourse if you could save more money in after tax accounts (such as Roth) prior to retirement, then you could use that to live on while you convert your ira to roth thus avoiding or keeping your tax very low both on the way in and the way out.

    • It’s important to get the first five years of early retirement living expenses funded. It might make sense to do Roth conversions while still working, but probably easier to simply save in taxable accounts (of course funding a roth each year too).

      You are right that roth withdrawals won’t count as income for ACA subsidy purposes.

  • Hey Justin, if our MAGI is at the point where we can only do a partial Traditional IRA deduction (let’s say $3,000 out of the $11,000), would you still recommend doing that or would you completely switch to Roth IRA contributions?

  • Hello Justin, I’m a newbie to all of this and have a few questions please. I only have a Roth IRA and a traditional 401k and my wife only has a Roth IRA and 403b.

    1. Are our only options to access our retirement funds early without penalty to pull out our Roth contributions and/or do a 72t against our 401k and 403b?
    2. Or can we roll over our 401k and 403b to a Roth IRA and create a ladder like you describe? 3. Is it correct that we can only do a roll over of of our 401k and 403b when we are no longer actively employed?
    4. Do we have to actually rollover the 401k and 403b to a traditional IRA first before being able to convert to a Roth IRA?
    5. We have a lot more funds in our 401k and 403b than our Roth IRAs, so is it better to pull the Roth IRA contributions first and then once drained do the roll over/conversion of the 401k fund 403b funds to a Roth IRA?
    6. Any other suggestions, articles to read, or things to think about that cover our scenario?

    • I believe you can convert 401k and 403b to Roth IRA but you usually have to wait till after separating from employment (unless your plan can do “in plan conversions” or rollovers).

      You can spend the Roth IRA contributions while you are converting from 401k/trad IRA to Roth. Tax wise it works out perfectly – zero tax on the Roth IRA contributions withdrawn, so you won’t owe much tax when you convert the 401k/trad IRA to Roth.

  • Sorry, im still pretty new to this. How do you fund $30k in a Traditional IRA every year if the IRS only allows you to contribute $5500?

    • Are you talking about the $30,000 annual conversion? You can convert any amount from Traditional IRA to Roth.

      • Right. But my question is how to fund the traditional IRA if I can only contribute $5500 yearly according to the IRS? How do I get that up to $30k yearly? Im sure im missing something here. Thanks for your help by the way. I love your site, this is my first post though.

        • Gotcha. Can’t put $30k into a traditional IRA. $5500 is max in 2016, or $6500 if you’re 55+. But you can put $18,000 into a 401k and when you quit working roll that into an IRA. Given some growth, that initial $18000+$5500 should be $30,000+ by the time you retire and start doing the Roth IRA conversions.

  • Awesome write up, thanks for taking the time to share and respond to commenters!! A few questions if you don’t mind…

    – How did you figure out you could start at 45 and still have enough for your golden years past 60? Would I estimate what balance I need in tax deferred accounts that would cover my expenses “forever” and then just estimate at what year I can hit that amount before 60?

    – Do you have separate Roth accounts for these conversions or can they be bundled up into 1 roth?

    • I have a spreadsheet to help figure all this out. But yes, you have to make sure you aren’t spending all your assets and impoverishing your 60 year old self. The 4% rule takes care of most of that though (the Roth vs taxable vs traditional IRA question is one of tax treatment).

      The conversions can go into the same Roth account(s) you already have open. No need to segregate those funds, and no benefit as far as I know.

      • Justin – Thanks a lot for taking the time to respond! It means a lot!

        If you have a few moments, I would really appreciate your feedback on a calculator I made for myself to help with this at It originally was a Google spreadsheet but and lot of people asked if I could turn it into something they could input their own values with so I turned it into a simple website page. Your feedback on this would be invaluable especially since I’m still on the path and you’ll know if the estimates are useful or have error.

        • Hey Sean,

          I took a quick look and plugged in some scenarios and the results seem realistic. Looks good!

        • I like your calculator! When I updated all the numbers and got a result and then changed the withdrawal rate and interest rate to see other scenarios, the calculator seemed to malfunction. For example, I lowered the withdrawal rate and then the retirement age and balance increased. Do you see that happening? Maybe it is just me?

  • I assume you have to wait until almost 12/31 to do the conversion each year.. ie I’ve been trying to do this but find calculating the dividends/Capital gains are difficult without final year end numbers. I’m also debating moving some of my dividend portfolio to more growth stock as to have less dividend income and more room to convert.

  • Since you are in essence a sole proprietor, can’t you also put your income from blogging into a taxed deferred SEP which allows a higher amount of taxes to be deferred as well as reduce your total income for taxation with your business expenses? In other words, leverage it all together as part of your clever plan?

    • I’ve been loading up a traditional solo 401k the past two years. Put in over $20,000 last year. In 2016 I’m planning on doing Roth 401k contributions to solo 401k for the $18000 employee max contribution.

  • So I need to keep investing into a traditional IRA and hold off the conversion? I’ve always invested in a roth until this year which I exceeded the income. I just completed my conversion from traditional to roth. Was this a mistake?

    • It’s usually better to wait to convert from traditional to Roth until you aren’t working. This way you will be in a lower tax bracket because you don’t have income from a job.

      • Thank you responding to my comment! I just recently found your blog and I am loving it! Great work! I forgot to add in on my question that I make over the taxable amount to write off a tROTH deduction. Does this change your opinion?

        • If you make too much to deduct a traditional IRA AND too much to contribute to a Roth, then you could do a non-deductible traditional IRA contribution and convert that to a Roth. If you have no other traditional IRA assets, you won’t owe any tax on the conversion (because you never got to deduct the traditional IRA contribution). If you have other trad IRA assets at the time of the conversion, it gets trickier and you’ll owe some taxes on the conversion since the conversion actually takes a proportion of your deductible and non-deductible trad IRA assets into the Roth. In other words it’s a little complicated.

  • Wow, glad I was lead here after reading some other stuff. I had a plan to use SEPP to withdraw my 401k and my wifes 403b during early retirement, but this strategy is much more flexible. You just need to plan 5 years ahead.

    What’s great is I also work for the government (as an engineer) so I get that awesome 457 as well.

  • Ok, I read many of the comments but skipped ahead – so I apologize if you addressed this already.

    Wouldn’t it make sense to use the conversion ladder to convert from a 401K to Roth even if you are not retiring anytime soon? We are a single income family, so my wife has no 401K. If I max out mine and max out two Roths, she still has no 401K. She is also 6 years older (I am 37, She is 43). With all our deductions we get down into the lower tax brackets with a taxable income of 40-50K (AGI around 120). But our effective tax rate is even less than that.

    I would rather have my money in a Roth, period, due to flexibility. So shouldn’t I start converting now and just aim to keep our taxable income as low as possible?

    • You might come out ahead starting to convert small amounts to a roth while still working, as long as you aren’t paying more in tax now than you will during retirement. Any chance your 401k allows Roth contributions? That would be a much easier way to get more $ in the Roth space directly.

  • I love this post, made me start plotting our own with conversions and helping me figure out pre and post tax money needed.

    Now, I have a random scenario see if you know the answers since I have been searching for a while and I am not clear yet (assuming current tax code remains).

    Assumptions: 2017, Husband and wife earn a combined income of $200k, $100k each, in which case we would not qualify for Roth IRAs (for simplicity’s sake, hypothetical example as I know we could potentially scratch by with some deductions in real life…but bare with me). We are at our last year of working just ‘practicing’ for retirement and so we can comfortably live for this year with brokerage money that we set aside for next 5 – 10 years. Starting in 2018 we would begin a conversion ladder for the Traditional IRA / 401k money money we have accumulated.

    Starting in Jan 2017, each decide to take an 80% deduction towards 401ks which means we max out after about 6 out of 26 paychecks + we ask to take out HSA money out of one account, so we would have a cumulative $1,550 give or take around end of March.

    At this point our pre-tax/gross income would reach a combined $46.1k or so, but after 401k and HSA deductions the taxable income would be around $8,500 (even lower if we consider medical premium deductions taken from my paycheck…).

    Two questions:

    1. If we quit immediately after that (March 2017), can we then contribute to both Roth IRAs with post tax accounts up to the max for each? Or could we only add $8,500 to our accounts? Hope the question is clear…

    2. My HSA is done via employee deductions and they take equal % of money by paycheck. Do you know if I would be able to send a check to them for the remainder of the years limit before I quit (and hence still have the insurance) up to the max for the year (knowing the following year I would not be able to fund it anymore as I would not be using that high deducible medical insurance)?


    • I think I get what you’re saying. 🙂

      Q1: If you only have $8500 earned income after the 401k withholding and HSA deductions, then you can only contribute to IRAs up to the max of your earned income ($8500 in your scenario). One solution I’d like to suggest: if one of you has access to a Roth 401k, stick $2500 of your 401k contributions into the Roth 401k and that’ll leave you with $11000 earned income, thereby allowing you to stick $11000 into a Roth IRA (basically maxing out your tax deferred savings without substantially increasing your tax bill; might be a slight hit to ACA subsidies if that’s in your plans).

      Q2: You’d have to ask your HSA provider if they would take a check for HSA contributions for the remainder of the year. If you’re using a HDHP for the whole of 2017 then you qualify to contribute the max for a full year to your HSA. Whether the HSA custodian accepts private contributions (ie not from the employer) is up to them. Mrs. RoG’s HSA is through Fidelity and they would accept additional funding from us I imagine (though we switched from HDHP to a $0 deductible plan when we jumped onto the ACA exchange policy).

      As always, these are just my somewhat educated guesses based on the info provided. I’m just a dude on the internet so consult your own tax advisor if you want 100% reliable tax advice 🙂

      • hahaha thanks “dude on the internet”. I actually found my tax advisor was not necessarily as insightful as I would have hoped so now I am looking for a new one. Plus I *may or may not* supposed to have known already about that first question since I used to work in the industry…lol (shhh, to be fair so much regulatory changes to keep track of with 401as, 401ks, 403bs 457 private or public, government or not, ERISA or not, contract types, the different IRS limits to keep track of, etc. random employee specific rules, and it has been a while….).

        Actually I do have Roth 401k – good thought! (and no to ACA I don’t think – depending on where we want to live and how things look then….). I suppose I could also work an extra month or two….nah! 😉

        Thanks again!

  • I understand the mechanics of how the Roth IRA conversion ladder works, but I’m confused on some of the details on how you go about maximizing your tax savings in the ramp up phase to make it actually work in practice.

    Say for example, I retire on December 1st of 2016.
    In April of 2017, I do my taxes (for 2016) as usual.

    1) Does it matter WHEN in 2017 I start the ladder? Can I do it on January 1 or does it need to be done at tax time? The Roth conversion is for the year when it’s actually done, correct? Unlike Roth contributions which can be done for the prior year up until the April tax deadline.

    2) When 2017 comes, since I’m now retired and have no earned income, my only source of taxable income is from dividends and gains distributions from mutual funds in my taxable brokerage account. If the Roth conversion counts as income for tax purposes, how do I calculate the “optimal” amount to convert each year? (using 2016 numbers for this example) The standard deduction is $6300 and the personal exemption is $4050. That totals $10350. If I were to subtract my expected dividends and gains distributions from that total, the remaining amount would be the maximum Roth conversion for my ladder that I could do tax free in that year. Is my understanding correct?

    3) How do the 10% and 15% tax brackets figure into this, if at all? For example, if I take money out of taxable investments for living expenses for the first five years of my ladder, how does one balance the tax liability from selling investments against the Roth conversion ladder while at the same time trying to stay in a certain tax bracket. It seems like there’s too many competing variables to juggle at one time without screwing yourself at tax time.

    Maybe I’m overthinking it but it seems like you need a piece of software where you plug all the variables in and it tells you what you need to do.

    Thanks for your time.

    • 1. Doesn’t matter when you do the conversions. It could be Dec 31 and in that case you only have to wait 4 years and a day before you can withdraw the amounts converted penalty free.

      2. You are correct – Roth conversions add to your taxable income (it’s just like withdrawing from the trad. IRA) so conversion+divs+cap gains = income. Keep it at $10,350 or below and you’ll owe zero. In fact, you could bump the Roth conversion to $10,350 then take another couple of ten thousand of LT cap gains and qualified dividends and STILL pay zero tax (just stay within the 15% tax bracket for your combined income).

      3. Yeah, it’s complicated. A spreadsheet could help you balance it out to smooth out your tax liability over your lifetime. You don’t want convert too much and creep up into a high tax liability in the 15%+ brackets, but you also don’t want to under-convert and end up short on Roth assets to allow your ideal spending level.

  • I’m pretty sure there is still a penalty to withdrawing converted amounts in a Roth before age 59.5. The IRS considers withdrawals from a Roth in this order: contributed, converted, and earnings. Can you show the IRS code that states that you can take converted amounts penalty free before age 59.5?

    • Here’s the relevant link from the IRS Publication 590 that explains you can withdraw conversions tax free:

      Are Distributions Taxable?
      You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA.

      • Derrick is correct there IS a penalty prior to making any withdrawals prior to age 59.5. Read what 590b says is a qualified distribution:

        “A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

        1.It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

        2.The payment or distribution is:

        1.Made on or after the date you reach age 59½,

        2.Made because you are disabled (defined earlier),

        3.Made to a beneficiary or to your estate after your death, or

        4.One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit). ”

        Note there is an “and” at the end of item 1. This is critical. The distribution MUST meet BOTH criteria to be considered qualified. Read what the next paragraph states if a distribution in not qualified:

        “Additional Tax on Early Distributions

        If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs. ”

        The methods you provide in your article are flawed and are bad advice if not over 59.5

        • Please go back and read the instructions for form 8606 part III carefully this time. I suggest you print out the pdf.

          You even said it yourself..a non qualified distribution *may* be taxable.

          Now go and read the rest to find the situations under which it is taxable.

          I do think you owe Justin an apology and maybe even a modicum of gratitude?

          • I’d suggest Mickey consult a qualified tax professional and not rely on anything on this page. Probably good advice for everyone but Mickey in particular. 🙂

  • I don’t understand how you can be converting $30K+ a year, added to your regular income while building the ladder, without virtually all of the conversion being taxed at or near the top tax rate.

    The other problem is, how much fun will retirement be on $50-65K income, ten or more years from now? 😮

    • For our family of 5, we can convert $32850 tax free (standard deduction + 5 personal exemptions), plus receive many tens of thousands of dollars in qualified dividends and capital gains with zero tax liability (up to top of 15% bracket). In fact, with the child tax credit we could incur a $3000 tax bill and have it wiped away too. Have you seen my article on earning $150,000 while paying $150 in tax?

      As for how much fun it will be living on $50-65k, we’re doing pretty well on $25-35k the past several years (2014 and 2015 expenses). Don’t forget we pay basically no tax and don’t have a mortgage. So an income of $50-65k is probably what a working family earning $100k+ would take home after taxes and some basic deductions. It’s impossible to NOT live well on a $100k salary in Raleigh!

      • So you’re saying you’ve already stopped working, and actually have no other income while making the conversions?

        Glad this works for you, and I wish you the best.
        I live in an even cheaper area than Raleigh, by a large margin, but I have hobbies that I spend that much on per year, and once I retire I’ll have even more play time to spend money. LOL I won’t retire and play bingo, I expect to spend far more in retirement, even without a mortgage, than I do now.

        • Bingo? Haven’t played that since I was a kid.

          How much are you planning on saving for retirement?

          • At least $2 million, in a portfolio of investments that will generate a combination of taxable and tax-free income. I’m estimating the taxable portion will be around $60K, with the tax-free adding about $30K more. I’m pretty close now, and plan to semi-retire in about 5 more years.

  • How much do you have to have in tax-deferred accounts TODAY to be able to do this for 25 years? What are your assumptions about returns during the full conversion ladder?

    The sum of all those 5-digit numbers in the left column of your actual ladder plan is 1,356,200…

    • I haven’t looked lately, but probably $700-800k+ in tax deferred accounts. Don’t forget that the money I’m converting 10-15 years from now will probably have doubled from today’s valuation, which is why the sum of future amounts converted exceeds what we have today in those accounts (think of the “$1 million lottery” that’s really 20 years of $50,000 payments but is worth about half that amount in present value).

  • Hi RoG,

    I have a SCorp and trying to decide to either go for SEP IRA or Self-employed 401K. I am not clear if the “Roth IRA Conversion Ladder” would work from a SEP IRA? Any input on whether to make the ladder work in the future with either SEP or SE 401K…. ?

    Thank you for such a great post btw 🙂

    • As far as I know there aren’t any restrictions on converting from a SEP IRA, so that should work. Converting from a solo 401k would also work.

      • Is it possible to open a SIMPLE 401k now and contribute now for tax year 2016 and also open a SOLO 401k now for tax year 2017? Not sure if both can be opened in the same year but not same tax year. Also I have already contributed the max to ordinary IRA for 2016. Also can a SIMPLE and a SOLO both allow converting to a Roth account so I can withdraw the funds in 5 years tax free provided I have enough room to do the tax-free conversion? Trying to lower my $8k tax burden for 2016.

  • I have contributed to a Roth since they began, stopped 10 years ago when I retired, have been converting about $30,000 a year the past 5 years. I’m 67. Do I understand correctly that since I’ve had the account more than 5 years and am over 59.5, I can withdraw any amount I wish, including last year’s conversion, and there is not tax or penalty ? Thanks for the great info. Also, I’ve always wondered if any surprises ever come up about record keeping. I’ve always reported conversions, but don’t recall how contributions were reported (or needed to be).

    • Yes, I believe so. Once you’re past 59.5 you can withdraw any amounts you want penalty free and tax free.

      I think there’s a form you get every year (5498?) that shows your Roth contributions.

      • Thanks. I know I’ve always reported whatever is required so far as I know, and do get my statements from the brokerage firm showing my conversion amounts, and see them on my tax returns. Roths are great, assuming no gotchas down the line. Almost too good to be true.

  • “an IRS rule that allows any amounts converted from a traditional IRA to a Roth IRA to be withdrawn penalty free and tax free.” Can you point me to this IRS rule? I looked at some publications on IRA and Roth IRA but couldn’t see where this conversion amount was a qualified distribution 5 years after. I saw that if you make a direct contribution, you could withdraw it 5 years later but not a conversion amount that was converted from a traditional IRA to the Roth.

    Also in your table, if you only convert 23800 in year one of your conversions how can you withdraw over 40k in year 5?

    • I don’t have the IRS code # handy to cite it, but it might have been posted in these lengthy comments before. It’s there though.

      I’m converting less than I’m withdrawing later because I start with a significant five figure amount in my Roth IRAs in year 1 (contributed while working).

    • read IRS pub 590b. It states that any distribution is a qualified distribution as long it meets two specific criteria as outlined in 590b.

  • Hi RoG,
    do you know if someone over 59.5 needs to wait the 5 years to withdraw the money, seeing as how they would not have to worry about the early penalty?

    Or, could someone age 60 convert 20k from Tira to Roth one year and begin spending that money tax free the following (ofcourse there will be taxes to worry about during conversion year)?


    • Pretty sure you can withdraw any time without penalty at age 60+. No rules restricting it on conversions.

      There is a restriction on 72t withdrawals (if you go that route). I recall it’s a 5 year period where you MUST keep withdrawing per the SEPP rules once you start, even if you are over age 59 during that 5 year period. So you could be locked into a strict withdrawal schedule till age 63-64. Totally different issue from a Roth IRA conversion though.

  • Would someone age 60, who will not have to worry about early withdraw penalty, still have to wait the 5 years to use the money? Or can they convert say 20k from tIRA to Roth and then the next year spend that monies tax free? Thanks!

  • I really like how you explained the whole concept and your framework for the ROTH Bank was phenomenal. I can now visualize how I need to set up an excel table in order to determine how much I need for the first 5 years and how much I’ll have available to project out.

    One Question I have that I don’t seem to see people addressing is State taxes. You live in NC which has a flat tax of about 5% last time I checked. Ever article I ever read about avoiding taxes only seems to be talking about the federal income tax and never the state income tax. How do you account for that in your calcs or is this income not taxed by the state?

    • It’s taxed by the state, but it’s pretty straightforward since pretty much every extra dollar is taxed at 5.x% by NC. I think the exemption is only first $15,000 of income here, so having income this year or the next costs the same thing from a state tax perspective (ignoring time value of money; better to pay taxes in the future rather than now, all else being equal).

  • If I convert from a regular IRA to a ROTH will they give me the cash value or would my investment carry forward. For example if I have $10,000 worth of investment in a low cost index fund such as VTSMX in a regular IRA and I would like to convert $10,000 into ROTH IRA would I get $10,000 cash rolled forward or would it be $10,000 invested in the mutual fund. sorry if i am not asking the question very clearly.

  • Do you end up opening a different Roth each year or just ONE Roth? Trying to figure out how both you and the IRS keeps track of the 5 year periods for each batch of money. I get that you can, and do, keep track in a spreadsheet.

    Anyway, very cool and once my income goes down to a low level here in another 13 months, I plan on freeing up my tIRA money each year up to the point of where I would start being taxed.

  • Great post Justin!

    Very useful as I deal with an end of year dilemma:
    – 401-k’s for wife and I are maxed out
    – My traditional IRA is maxed out
    – Wife’s IRA –> here is where the question comes: do we max out her traditional IRA or put the $5,500 into a Roth IRA.
    The reasoning for choosing a Roth IRA for this year would be to have accessible funds for the first 5 years of the conversion ladder.
    The reasons for choosing a traditional IRA would be to minimize current tax liability.

    What would you do? Or what questions should I ask myself to make the best decision?

    • Tough call but I would probably go for traditional IRA for the immediate tax savings. You’ll probably have more time in the future to contribute to Roths when you are no longer eligible for Trad IRA contributions due to high income.

  • Great post! Without paying the 10% penalty, I think the question is down to taxes you pay now (I’m currently on a Roth 401K) versus tax you pay at conversion few years down the road. How do you make sure that the taxes you pay on conversion later is lower than today?

    • Try to stay in the same tax bracket while working and retired. For us that’s been 10% or 0%. We might be in 15% later on many years down the road if our investments are ridiculously profitable. When I have an extra million or two dollars and pay higher taxes to access the newfound wealth, I won’t scream too much about being in the 15% marginal bracket 🙂

  • Good stuff, Can I convert directly from my 401(k) to a Roth IRA or do I have to take the route of 401(k)->IRA->Roth IRA?


    • Typically you can go straight from a traditional 401k to a Roth IRA. I suppose it’s theoretically possible some custodians might not take the rollover from a 401k into a Roth for some reason but generally you can go straight to a Roth IRA.

  • Hankaroundtheworld

    Hi RoG, we met at ERE a year ago, and I am just reading thru your great blog again. I have a question around 401k, probably not easy, but may be you know someone that can help. I have a 401k from the past when I was working in USA as expat (I am from Europe). I am planning to wait till 60 to start withdrawels, but I have no clue how to organize this. My questions are: (a) do I need a Bank in the USA to receive money from the 401k account, or can I wire it internationally? (b) how can I lower or avoid Tax on what I withdraw?

    • Hey Hank! I remember our chats over there at ERE. Good to hear from you.

      Tough question! It really depends on what your 401k custodian will allow you to do. I imagine most could wire you the proceeds but you might pay a wire fee (maybe at the 401k and at your local bank) and a foreign currency fee. Of course maybe we’ll have easier international currency transfer in the future.

      As for lower taxes, waiting till 60 avoids the 10% penalty, so there’s that. Good to see you’re planning on doing that. Otherwise my pure 100% guess is that they will withhold a mandatory 20% to cover your federal tax bill and then you would have to file taxes to get any of that back. If you don’t have a lot of income during retirement then you might be able to get most of the amount back (A single person can take over $10,000 income completely tax free and the next several thousand are taxed at 10%). Another tip if you have a large account balance (as in $20,000+), you might want to spread the withdrawal over 2 or more years so you don’t go up into higher tax brackets in one year. Of course you have to balance the tax cost against filing international taxes (if you pay someone) and those wire transfer fees.

  • I’m looking at doing the conversion ladder for my early retirement in the future. I’m trying to run all the numbers through the tax forms to make sure I understand everything properly and don’t miss anything. One thing I’m confused on… I see everyone reference that you must wait 5 years to withdraw conversions (Hence the whole ladder discussion). However, on form 8606, line 24, the basis in conversions seems to be calculated without any regard to waiting 5 years? On the instructions, if you’ve never had a distribution in excess of basis then you enter the total of all previous years conversions, even the current year conversion.

    I’m guessing there’s something I’m missing, but I can’t seem to figure it out…

  • I would like to make sure I understand this properly. Say, for example, you want 20k a year. By the 4% rule, this means your number is 500k. Is it correct that to do this, you would need 500k saved away, plus 100k in addition (five years of living expenses)? Thank you.

    • The $100k you would need in your hypothetical is a part of the $500k total to get to 20,000 per year using the 4% rule. So $100k accessible somewhere else plus $400k in IRA to convert to Roth.

  • I haven’t started yet but I may start converting this year. The Roth conversion ladder is, by far, the most important technique I’ve learned since I started reading about early retirement.
    Thank you

  • I don’t know if this works for me. I’m a temp here in the US and will move back to my country once my L1 visa expires in 4.5 years. I’m contribution the minimal to my 401k because I don’t want to have a lot of money trapped here but also don’t want to loose some money the company matches ( up to 3%). That said, I would like to know if I’m doing the right thing here

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