A guide to Roth IRA conversion ladders

This article will ... Note how Roth IRA conversions are used, who can use them, and their tax implications. Explain what a Roth IRA conversion ladder is and how it can address some of those tax implications. Review the challenges of timing and rules related to Roth IRA conversion ladders.

If you’re looking to lower your future tax bill or maximize the financial legacy you leave behind, chances are you’ve at least considered converting some of your pretax retirement savings to a Roth IRA.

After all, Roth IRAs offer a number of potential advantages, chief among them:

• Tax-free growth and withdrawals.
• No required minimum distributions.
• Early access to your retirement funds.
• The ability to pass it to your heirs tax-free (if conditions are met).

The tax benefits of a Roth IRA may be all the more enticing against a backdrop of pending income tax rate hikes and lower estate tax exemption limits, which may take effect in 2026, absent congressional action. (Learn more: Plan now? The estate planning 2026 question mark)

Who can do Roth IRA conversions?

Roth conversions allow you to shift money from tax-deferred retirement accounts, but depending on your income, you may not be eligible to make direct contributions to a Roth IRA. (Related: Roth IRA conversions explained)

In 2024, married taxpayers who file jointly must have modified adjusted gross income of $240,000 or less to contribute. Single, head of household, and married taxpayers filing separately must have income of $161,000 or less.¹ (Related: Retirement plan contribution limits. Your need-to-know)

As a result, higher-income earners who wish to open a Roth IRA must do so indirectly by moving savings from their pretax retirement accounts, such as a traditional IRA or 401(k), into a Roth IRA. This is known as a Roth IRA conversion. (Note that some employers may not permit employees to convert their 401(k) funds.)

Retirement savers who are not eligible to contribute to a Roth IRA directly due to income thresholds can also potentially set up a backdoor Roth IRA, which involves making non-deductible contributions to a traditional IRA first and then converting those dollars into a Roth IRA. (Learn more: Backdoor and mega-backdoor Roths: Who they’re for and how to use them)

As for Roth IRA conversions from pretax accounts, any savings you convert are subject to ordinary income tax in the year you make the conversion — because neither the contributions nor the earnings were ever taxed. Your tax liability will be determined by your individual income tax bracket, which ranges from 10 percent to 37 percent.

To reduce the taxes you owe, some financial professionals recommend converting pretax savings to a Roth IRA when your account balance is lower due to a stock market decline, or when you’re in a temporarily lower tax bracket. For example, many new retirees drop to a lower tax bracket immediately after they retire but before Social Security kicks in.

“The best time to do a conversion ladder is when the market is down, so you’re doing the conversion on sale,” said Paul Mass, owner and founder of ClearView Financial Solutions in New York City. “You definitely get more value for the transaction.”

There is no limit to how much of your pre-tax retirement savings you may convert to a Roth IRA, but doing so all at once can potentially bump you into a higher tax bracket for the year because the funds converted get added to your taxable income. (Related: Traditional to Roth IRA conversion: Should you?)

That negates some of the benefit of doing a Roth IRA conversion to begin with. It may also inadvertently reduce your Social Security income.

“Roth conversions could push you into a higher tax bracket, which could also affect your Social Security benefit,” said Mass. “You are potentially increasing the amount of your Social Security benefit that gets taxed because of your higher provisional income in the year you convert.”

Enter the Roth IRA conversion ladder.

What is a Roth IRA conversion ladder?

A Roth IRA conversion ladder describes the strategy of moving funds from a pretax retirement account to a Roth IRA in smaller increments over multiple years to avoid a large one-time tax bill.

Generally speaking, the goal would be to convert just enough pretax funds in any given year to avoid triggering the next higher tax bracket. You would then continue that process for as many years as it takes to convert all or most of your pretax savings.

A financial professional can help you determine whether a Roth IRA conversion ladder makes sense for you.

Is a Roth IRA conversion ladder right for me?

A Roth IRA conversion ladder might make sense for you if you:

• Expect to be in a higher tax bracket during retirement. Depending on your withdrawals and your guaranteed income streams, your retirement income could potentially be higher than it is today, which might push you into a higher tax bracket. Your income may be derived from a combination of Social Security, pension checks, annuity payments, withdrawals from your taxable brokerage accounts, and required minimum distributions (RMDs) from your traditional IRA and 401(k). By prepaying your tax liability at a lower rate today, you could potentially reduce your future tab to Uncle Sam. (Related: Turning 73: Required minimum distributions explained)

“We see a lot of retirement savers in their late 40s and early 50s beginning their Roth IRA conversions,” said Mass. “We also see a lot of high-income earners who have deferred a large amount of taxable earnings through their pretax retirement accounts because they realize what’s ahead for them.”

• Wish to maximize the financial legacy you leave for your heirs. Why? Unlike traditional pretax retirement accounts, Roth IRAs are not subject to RMDs beginning at age 73, which may enable those funds to continue delivering tax-free growth for longer. And if you don’t deplete your Roth IRA during retirement, any balance that remains can be passed tax-free to your heirs — a potentially bigger benefit to beneficiaries in the wake of new legislation.

“This can be a very effective estate planning tool,” said Reed Willett, a vice president of Coastal Wealth in Ft. Lauderdale, Florida, noting that the new SECURE 2.0 regulations generally require beneficiaries to fully distribute inherited retirement accounts within 10 years of the original account owner’s death. “All pretax accounts get counted as ordinary income for tax purposes, while Roth IRA assets, which still require a 10-year distribution schedule, do not add to the beneficiary’s taxable income.” Thus, he said, if you pass along several million dollars in pretax retirement assets, your beneficiaries could potentially end up paying a much higher tax rate than they otherwise would because of the progressive tax system. “I always ask about the owner’s and the beneficiaries’ tax brackets in order to determine whether or not this strategy makes sense from an estate planning perspective,” said Willett. (Learn more: What are the distribution rules for an inherited Roth IRA?)

• Plan to retire early. Roth IRA owners can access their contributions and, in some cases, even their earnings penalty-free before age 59½ (more on those rules below.) Future early retirees sometimes opt to convert only the amount needed to cover their annual living expenses from the day they retire until they turn 59½, when they can access their pretax retirement savings penalty-free. Others seek to cover their expenses until they turn age 67, when they become eligible for their full Social Security benefit.

It is important to note that most financial professionals advise against taking money from your retirement accounts early unless you’ve socked enough savings away to maintain your standard of living throughout retirement. (Related: The unexpected problems with early retirement)

The Roth IRA rules

If you are considering a Roth IRA conversion ladder, you should familiarize yourself with the rules — especially if you prioritize the flexibility of early withdrawals.

For starters, there is an important distinction between your contributions and your earnings when it comes to withdrawals.

• You can withdraw your Roth IRA contributions (the money you put into the account) at any age without taxes or penalty because those dollars have already been taxed.
• Generally speaking, however, you must be at least age 59½ AND your Roth IRA must have been open for at least five years to withdraw Roth IRA earnings without paying income taxes or the 10 percent early withdrawal penalty. For those creating a Roth IRA conversion ladder, be aware that each Roth IRA conversion has its own five-year holding period before those earnings can be accessed penalty-free. “You would generally want to consider a Roth IRA conversion only if you have at least a five-year window before you retire,” said Mass.

There are some exceptions that may permit you to take penalty-free early withdrawals on earnings.

Individuals who are not yet age 59½ and have not had their Roth IRA open at least five years would still owe taxes on any earnings they withdraw, but they could potentially avoid the 10 percent penalty if the funds are used to pay for certain expenses, such as:²

1. A first-time home purchase (up to $10,000 lifetime limit).

2. Education costs.

3. Unreimbursed medical bills.

4. Some emergency expenses.

5. Costs related to a birth or adoption.

Early withdrawals of earnings from a Roth IRA that you have owned for five years or longer are not subject to taxation if you use the funds to purchase a first-time home (again, up to a $10,000 limit) or you become disabled or die.

After age 59½, Roth IRA account holders are no longer subject to the five-year rule and may take withdrawals both tax- and penalty-free.

Conclusion

With higher tax rates looming and new withdrawal rules for inherited IRAs, a growing number of retirement savers are converting pretax savings to a Roth IRA — choosing to take the upfront tax hit today in exchange for a lower future tax bill.

In some cases, a Roth IRA conversion ladder could potentially help you take advantage of the tax benefits that a Roth IRA provides without bumping you into a higher tax bracket.

But retirement savers should consult a financial professional to discuss the pros and cons to determine whether a Roth IRA conversion ladder might help them reach their goals.

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