Tax Update: Roth conversion ladders make more tax-free retirement savings possible
- December 1, 2022: Vol. 9, Number 11

Tax Update: Roth conversion ladders make more tax-free retirement savings possible

by Elizabeth Ayoola

The Roth IRA can be an attractive retirement account for investors. One reason is that Roth IRAs can help you save money on taxes, especially if you anticipate being in a higher tax bracket in the future.

A strategy called a Roth conversion ladder can help with more tax savings on money you may have stashed away in other retirement accounts.

What is a Roth conversion ladder?

First, let’s start with the Roth IRA, a retirement account that allows investors to enjoy tax-free growth and make tax-free withdrawals in retirement. That’s because you pay taxes on your money before depositing it into the Roth. You can also withdraw your contributions at any time, tax and penalty free.

Roth IRAs have income limits as well as annual contribution limits — $6,500 in 2023 (or $7,500 if you’re age 50 or older). But there’s no limit on the amount of money you can convert to a Roth IRA, and there are no income limits on conversions, either.

A Roth conversion ladder is when you take money from tax-deferred retirement accounts and move it into a Roth IRA gradually. With inflation at a 40-year high, now might be a good time to consider using this ladder to climb your way to tax-free withdrawals in the future.


“You’re basically taking a portion ... a little bit every year, until such time that either you’ve made your entire retirement tax free, or you’ve exhausted the top of your tax bracket,” says Renee Collins, a certified financial planner and certified public accountant at Retire Ready Inc., a financial planning firm in Chicago.

Roth ladders are most helpful to people who have most of their money in traditional IRAs and 401(k)s and expect to be in a higher tax bracket in the future, Collins says. Because those tax-deferred accounts require you to pay taxes once you make withdrawals, moving those funds gradually to a Roth IRA now could mean saving on taxes in retirement.

That way, more of your money could get tax-free growth. You can also make tax-free withdrawals of your converted Roth IRA contributions after five years. And remember, the clock is set to five years for every new contribution you make.

Using a Roth conversion ladder is a form of tax diversification, which is when investors use a mix of taxable and tax-free accounts to help lower the tax they pay when they retire.

“Right now, what I find with most clients is that there is no tax diversification,” Collins says. “And most clients don’t plan for taxes, so they just assume that they’re going to be in a lower tax bracket in retirement.”


The Dow Jones, S&P 500 and Nasdaq are all down year-to-date. Many stock prices have dipped, while inflation has remained stubbornly high. The upside to the down market for retirement investors is that if you convert some of your money from a tax-deferred retirement account into a Roth now, you’d potentially pay less than if your portfolio hadn’t taken a hit, says Ali Swart, a CFP at Waldron Private Wealth, based in Bridgeville, Pa.

“The more important thing is that you are getting that money into a completely tax-free vehicle with the Roth IRA,” she says. “You’re converting a lower amount, and we all know that the markets will eventually rebound, and all of that growth is going to be captured tax-free.”


Excerpted from a NerdWallet article written by Elizabeth Ayoola. Read the original and complete article — including the use of Roth ladders for early retirement — here.

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