The Roth conversion ladder

One of the biggest obstacles to early retirement is that traditional retirement accounts have a 10% early withdrawal penalty before age 59½. The Roth conversion ladder is a well-established workaround that lets you access pre-tax retirement money in your 40s or 50s without penalty, used by much of the FIRE community.

How it works

1. Retire. Your income drops, usually to near zero.
2. Each year, convert a chunk of your Traditional IRA to a Roth IRA. You pay ordinary income tax on the converted amount, but in a low-income retirement year, the tax hit can be tiny or zero.
3. Wait 5 years. The converted amount can then be withdrawn from the Roth tax-free and penalty-free (the 'five-year rule').
4. In year 6, you're withdrawing the amount you converted in year 1, while converting a new chunk to be available in year 11.
5. Repeat every year for the rest of your early retirement, creating a rolling 5-year pipeline of penalty-free withdrawals.

Requirements and warnings

• You need 5 years of other funds to live on while the first conversion 'seasons.' This is what the taxable brokerage is for.
• Each conversion starts its own 5-year clock. Yearly conversions create yearly access windows.
• Converting counts as taxable income. Plan it to fill up low tax brackets without spilling into higher ones.
• Health insurance subsidies on the ACA marketplace depend on income. Too much conversion can cost you subsidies. Model carefully.