Published on: July 27, 2020

Tips on How to Successfully Manage a Roth IRA Conversion Ladder

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    There is something about going to work every day that makes you dream about retirement. Of course, one of the biggest concerns about retirement is having enough money to enjoy your retirement, and you already know Social Security isn’t going to cut it. Most of the experts agree that you’re going to need 80 percent of your current salary when you retire. So, if you’re making $100,000 a year now, you’ll need $80 annually once you retire. 

    Most people save for retirement in one of three accounts: an individual retirement account (IRA), a 401(K), or a Roth 401(K). Then, there may come a time when you want to manage a Roth IRA conversion ladder. This allows you to move money from an IRA or 401(K) into a Roth 401(K). You would want to do this to retire early and access your retirement funds before age 59 1/2, or your tax bracket has grown higher than you expected and it’s going to keep going up. Here’s what you need to know about Roth 401(K) and a Roth IRA conversion ladder, including the steps to creating a Roth IRA conversion ladder. 

    What Is a Roth 401(K)?

    Roth 401(K) is a retirement account that’s sponsored by your employer. In many cases, your employer matches the funds up to a certain percentage of your salary that you put into your Roth 401(K). With this type of 401(K), the money that you invest in the account has already been taxed by the Internal Revenue Service (IRS).

    Since the money was taxed before entering the account, you don’t have to pay taxes on the money upon withdrawing it at retirement. However, if you choose to take the money out before you reach the age of 59.5 or before five years, you’ll pay an early withdrawal penalty of up to 10 percent. There are some cases where you can take the money out early without paying a penalty, such as total disability. 

    Decide how to invest the money after placing funds into your Roth 401(K) and before taking it out in retirement. Many people invest it in safer mutual funds, while others sink the funds into stocks and bonds. There are rules about how much you can put into the Roth 401(K). As of 2019, the amount was $19,500 per year. Investors over 50 can put in catch-up contributions of up to an additional $6,000 per year. 

    If you leave your current employer, you need to make a decision about what to do with your Roth 401(K). You can cash it out, move it to an IRA, leave it in the current Roth 401(K), or move it to your new employer’s Roth 401(K).

    What Is a Roth IRA Conversion Ladder?

    Roth IRA is similar to a Roth 401(K) with the exception that you can withdraw money without a penalty at a younger age after five years. Further, you can place more funds into the account than a Roth 401(K). This is the type of account that you want to use if you want to retire early. 

    For example, if you want to retire at 45, it’s a long time before you’re going to reach 59.5 and be able to access your regular Roth 401(K) without the 10 percent penalty. Of course, you must plan ahead to be able to access funds at 45 because the money must be in the Roth IRA for at least five years. You need to start placing the money in the Roth IRA when you’re 40 and continue doing so each year until you reach the age of 54. The money you place in the Roth IRA at 54 will be available when you’re 59. After that year, you can access your regular Roth 401(K). 

    You need to be careful when moving funds from your 401(K) or IRA to a Roth IRA. You don’t want the IRS to audit your accounts and discover that you’ve done something incorrectly. When tackling a financial transaction like this, it’s always best to get a professional involved in the process. They can ensure that you’re determining your tax liability correctly. 

    Steps for a Roth IRA Conversion Ladder

    As you move money into a Roth IRA each year, it creates individual accounts that become available one after another and appear to resemble rungs on a ladder. Creating a Roth IRA conversion ladder seems fairly simple. However, since you need to pay taxes on the money you’re moving into the account so that you don’t pay taxes when you pull it out, it’s beneficial to work with a professional to ensure you don’t make any mistakes.

    Tips on How to Successfully Manage a Roth IRA Conversion Ladder

    Here are the steps you need to take to create your Roth IRA conversion ladder: 

    Step One

    Move the money from your traditional 401(K) to an IRA. It’s easy to do this when you leave one employer to go to another. However, if you intend to continue working for your current employer until you retire, you need a financial expert to help you with the account movement.

    Step Two

    Move the funds to your Roth IRA from your traditional IRA. At this point, you’re going to be paying taxes at your current tax rate on the funds moving into the Roth IRA. Talk to your account or tax attorney to ensure that you’re paying the correct amount. You don’t want problems with the IRS. 

    Step Three

    Wait for the required five years. If you take money out of the Roth IRA during this period, you’ll be subjected to a 10 percent penalty. 

    Step Four

    Now, that the five years have passed, you can remove the funds and any additional earnings out of the Roth IRA tax-free. 


    At Silver Tax Group, we’re experts at creating Roth IRA conversion ladders. We can partner with you to make your dream of a comfortable early retirement a reality. Contact us today to schedule an appointment. 

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