Roth conversion ladder tax cost

The Roth conversion ladder — pay tax now to avoid more tax later

A Roth conversion moves money from traditional IRA (pre-tax) to Roth IRA (after-tax) — taxable as ordinary income in the conversion year. The strategy: convert during low-tax years (early retirement, gap years) to avoid higher-bracket Required Minimum Distributions later.

When conversions win

• Current bracket < expected future bracket: classic case — early retiree at 12% bracket vs RMDs forcing 24% later
• Recently retired pre-Social Security: 5-10 year gap where income drops dramatically
• Inheritance planning: heirs in high brackets; pay your lower rate now to avoid their later
• Estate tax planning: Roth assets pass tax-free; reduces estate income tax drag

When to NOT convert

• Currently in 32%+ bracket; expected future bracket lower (e.g. you'll relocate to no-state-tax state)
• Need the cash to pay tax (don't convert if you'd liquidate the converted amount to pay)
• Recent year-end income spike that pushes you into a one-time higher bracket
• Within 5 years of needing the money (5-year rule on conversions for under-59½ withdrawals)

The 5-year rule traps

• Each conversion has its own 5-year clock
• Under 59½: 10% penalty on principal of conversion if withdrawn before clock matures
• After 59½: no penalty, but the 5-year rule on EARNINGS still applies if Roth IRA is younger than 5 years overall

Common ladder design

For early retirees (50-60): convert ~$30-50k/yr filling the 12% or 22% bracket. By age 73 (RMD start), traditional IRA is depleted. RMDs from Roth = $0. Lifetime tax: substantially lower.