A Roth conversion ladder is a strategy that can be used by people who want to access the funds in their traditional IRA or 401(k) without paying taxes and penalties on early withdrawals.
The basic idea of the Roth conversion ladder is to convert money from a traditional IRA or 401(k) account into a Roth IRA account over a period of several years, with the goal of creating a source of tax-free income in retirement.
Here’s how it works:
- Convert a portion of your traditional IRA or 401(k) to a Roth IRA each year.
- Wait at least 5 years after each conversion to withdraw the money from the Roth IRA, in order to avoid paying taxes and penalties on early withdrawals.
- Repeat this process each year until you have converted enough money to create a sufficient tax-free income stream in retirement.
The Roth conversion ladder is a popular strategy among early retirees, who want to access their retirement funds before they reach age 59.5, when they would normally be subject to taxes and penalties on early withdrawals from traditional retirement accounts. It can also be a good strategy for people who expect to be in a higher tax bracket in retirement, since Roth IRA withdrawals are tax-free.