A Roth conversion ladder allows you to withdraw your contributions from your tax advantaged accounts like a 401k without penalty before reaching the age of 59 1/2.
You have 3 choices of investment accounts:
Traditional 401k (not taxed on deposit, taxed on withdrawal)
Roth 401k (taxed on deposit, not on withdrawal)
Brokerage (taxed on deposit + taxed on withdrawal)
The 401k accounts are better, but they have an early withdrawal penalty; if you try to withdraw 401ks before 59 1/2, you’ll have to pay tax on 10% of the withdrawals.
The Roth conversion ladder allows one to get around that restriction. You would deposit money into a 401k and then convert that money into a Roth IRA, paying your tax during the conversion. Afterwards, you can withdraw your conversion in 5 years.
So, you convert your yearly spend 5 years before you need to withdraw it, and you can withdraw it tax free. (investopedia n.d.)
Year |
Age |
Conversion Amount |
Withdrawal Amount |
Source of Funds |
|---|---|---|---|---|
2022 |
40 |
$50,000 |
$0 |
|
2023 |
41 |
$50,000 |
$0 |
|
2024 |
42 |
$50,000 |
$0 |
|
2025 |
43 |
$50,000 |
$0 |
|
2026 |
44 |
$50,000 |
$0 |
|
2027 |
45 |
$50,000 |
$50,000 |
2022 conversion |
2028 |
46 |
$50,000 |
$50,000 |
2023 conversion |
2029 |
48 |
$50,000 |
$50,000 |
2024 conversion |
2030 |
47 |
$50,000 |
$50,000 |
2025 conversion |
2031 |
49 |
$50,000 |
$50,000 |
2026 conversion |
2032 |
50 |
$50,000 |
$50,000 |
2027 conversion |
2033 |
51 |
$50,000 |
$50,000 |
2028 conversion |
2034 |
52 |
$50,000 |
$50,000 |
2029 conversion |
2035 |
53 |
$50,000 |
$50,000 |
2030 conversion |
2036 |
54 |
$50,000 |
$50,000 |
2031 conversion |
2037 |
55 |
$0 |
$50,000 |
2032 conversion |
2038 |
56 |
$0 |
$50,000 |
2033 conversion |
2039 |
57 |
$0 |
$50,000 |
2034 conversion |
2040 |
58 |
$0 |
$50,000 |
2035 conversion |
2041 |
59 |
$0 |
$50,000 |
2036 conversion |