Roth Conversion Ladder

Each rung is an ordinary Roth conversion: you move money from a traditional IRA, or roll it from an old workplace plan, into a Roth IRA and report the taxable amount as income that year. The conversion itself isn’t hit by the 10% early-withdrawal tax, even before 59½.

The ladder rests on a timing rule in IRS Publication 590-B. If you are under 59½ and withdraw a converted amount within five years, the part you paid tax on is charged the 10% additional tax. After those five years it comes out free of both tax and penalty, because the tax was paid on the way in. Each conversion gets its own five-year period, starting January 1 of the year you convert.

Convert every year and you get a staircase: the 2026 conversion becomes available in 2031, the 2027 conversion in 2032, and so on. Roth withdrawals follow a fixed order that keeps the ladder tidy: regular contributions first, then conversions from the earliest year, taxable part first, and earnings last. Earnings withdrawn before 59½ are taxed and penalized, and they stay taxable until the Roth IRA also passes its own separate five-year test, so a ladder spends converted principal, not growth.

A ladder pays nothing for its first five years, so it needs a bridge. Common sources are cash and a taxable brokerage account; your own past Roth IRA contributions, which are available at any time; withdrawals under the rule of 55 if you left a job in or after the year you turned 55; and a 72(t) series from a separate IRA.

The size of the bridge sets how early the ladder can start. Someone spending $60,000 a year needs about $300,000 outside pre-tax accounts to cover five years, before any part-time income or inflation. The January 1 start helps a little: a conversion made in December 2026 still opens on January 1, 2031, just over four years later.

When to begin is a tax question. Converting while you still earn a salary stacks the conversion on top of wages, often in the 22% or 24% bracket. Many early retirees begin in the first low-income year after work, which is also the first year the bridge is being spent, so the bridge and the ladder run side by side until the first rung is ready.

A conversion is ordinary income, so the cheapest rungs fill the standard deduction and the low tax brackets. For 2026 the standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers. The 10% bracket covers the first $24,800 of taxable income on a joint return ($12,400 single), and the 12% bracket runs to $100,800 ($50,400 single). With no other income, a married couple could convert about $133,000 and stay in the 12% bracket; a single filer, about $66,500.

Conversion income moves other numbers too. It is counted before long-term capital gains, so it can push gains out of the 0% rate, which in 2026 ends at $98,900 of taxable income on a joint return. It raises the modified AGI used for marketplace health insurance, and for 2026 coverage a household above 400% of the federal poverty line, $84,600 for a couple under the 2025 guidelines, loses the premium tax credit entirely. Most states with an income tax also tax it.

All three routes reach pre-tax money before 59½ without the early withdrawal penalty, but they spread the tax and the commitment differently.

A ladder pays tax up front, in years you choose, and then gives complete freedom: after five years each rung can be spent, left to grow tax-free or passed on. It needs lead time and a bridge. A 72(t) series starts paying at once and is taxed as it arrives, but the amount is fixed by formula and must continue until the later of five years or 59½. The rule of 55 is the simplest of the three but covers only the workplace plan of an employer you leave in or after the year you turn 55.

They also combine. IRS Publication 590-A notes that you can convert an IRA already paying a 72(t) series and continue the payments without the 10% tax. Someone leaving work at 55 with most savings in the old 401(k) may not need a ladder for access at all, though conversions in low-income years can still shrink later required minimum distributions.

The rules are simple but unforgiving about details, and several errors can’t be reversed once the tax year closes. Keep a record of every conversion year and amount: the ordering rules decide what each later withdrawal counts as, and it is your own Form 8606, not the custodian, that sorts each withdrawal into contributions, conversions and earnings. Treat each year’s rung as a fresh decision, not an automatic transfer. The mistakes that most often cost early retirees money: