Definition
An early-retirement strategy of converting a slice of pre-tax retirement money to a Roth IRA every year, then withdrawing each converted amount five years later. Converted principal can be taken out penalty-free once its own five-year clock has run, even before 59½, so a series of annual conversions produces a series of penalty-free withdrawals that starts five years after the first rung.
Why it matters
The ladder is how people who retire in their 40s or 50s reach 401(k) and IRA money without the 10% penalty, while paying tax on each conversion in years when their income, and therefore their rate, is low. It only works with five years of other money to live on while the first rung matures.
Example
A 45-year-old retiree with $600,000 in a traditional IRA converts $40,000 each year. In years one through five she lives on $200,000 held in a taxable brokerage account and cash; from year six onward she withdraws the $40,000 converted five years earlier, penalty-free, every year. Because $40,000 of conversion is her only income in each of those years, the tax on each rung is small, perhaps $3,000.
Put it into practice
Related terms
Roth conversionFIRE (Financial Independence, Retire Early)Rule of 55Substantially equal periodic payments (72(t) / SEPP)
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.