Roth Conversion Ladders: When They Help and When They Hurt

A Roth conversion ladder can create early-retirement liquidity and reduce future tax pressure. It can also turn a modest conversion into a much larger bill once health-insurance subsidies, Medicare premiums, Social Security, capital gains, and other income-based rules are counted.

July 18, 2026

A Roth conversion ladder sounds more complicated than it is. You move part of a pre-tax retirement account into a Roth IRA, pay ordinary income tax on the taxable amount converted, and repeat the process over several years. Each conversion becomes another rung in the ladder.

What makes the strategy useful is not the word "Roth." It is the ability to choose when retirement income appears on your tax return. You are deliberately recognizing income in years when you believe the total cost will be lower, rather than waiting for required minimum distributions, an unexpected tax-law change, or a surviving spouse's narrower tax brackets to make the choice for you.

There are two common versions of the strategy. The first is an early-retirement spending ladder. It uses a series of conversions and the Roth IRA's five-year rules to create access to converted principal before age 59 1/2 without the normal 10% early-distribution tax. The second is a tax-management ladder. It spreads conversions across several low-income years to reduce future required distributions and build a pool of tax-free assets. A household can use both versions at once, but they solve different problems.

The phrase "fill the bracket" is often used as if that settles the decision. It does not. The income-tax bracket is only the first layer. The right conversion amount is the one that minimizes the household's expected lifetime tax and planning costs while preserving enough liquidity to live through the strategy. Sometimes that means converting aggressively. Sometimes it means converting a smaller amount. Sometimes the right conversion is zero.

A Roth conversion moves money from a Traditional IRA or another eligible pre-tax retirement account into a Roth IRA. The taxable portion is included in ordinary income for the year of conversion. The conversion is not subject to the 10% early-distribution tax at the time it is completed, regardless of age, but a later withdrawal may be if the conversion has not satisfied its separate five-year period and no exception applies. A required minimum distribution cannot be converted; once RMDs apply, that year's RMD must come out first and remain taxable.¹

There is no annual dollar limit and no income ceiling on conversions. That flexibility is valuable, but it also means the tax code will let you make a conversion that is much larger than your plan can absorb. Unlike a Roth contribution, which is constrained by annual contribution limits, a conversion can be $20,000, $200,000, or an entire IRA. The limit is economic, not administrative.

The early-retirement version works because Roth IRA distributions follow ordering rules. Regular Roth contributions are treated as coming out first. Converted amounts come out next, oldest conversion first, with the taxable portion of each conversion ahead of its nontaxable portion. Earnings come out last. Each conversion has its own five-tax-year period for purposes of the 10% additional tax.²

Consider an investor who retires at age 50 in 2026 and converts $60,000 at the end of each year from 2026 through 2030. The 2026 conversion's five-year period begins January 1, 2026, even if the conversion occurs in December. After the five tax years 2026 through 2030 have passed, that converted principal is available beginning in 2031, subject to the Roth ordering rules. The 2027 conversion becomes available in 2032, and so on. Figure 1 shows the sequence.

This is where many online descriptions stop, but the first five years are the hardest part of the plan. The household needs a bridge made of taxable savings, cash, Roth contribution basis, earned income, or another penalty-free income source. A ladder is not an instant-access technique. It is a delayed-access technique.

Figure 1: Illustrative $60,000 annual conversions made from 2026 through 2030. Each converted amount reaches the end of its separate five-tax-year period from 2031 through 2035. Actual access depends on age, Roth ordering rules, prior activity, and applicable exceptions.

Roth IRAs have two five-year concepts, and confusing them can produce an expensive mistake.

The first determines whether Roth IRA earnings can be part of a qualified distribution. That clock generally begins January 1 of the first tax year for which any contribution or conversion was made to any Roth IRA for the owner. A qualified distribution also requires a qualifying event, most commonly reaching age 59 1/2. Once both conditions are met, principal and earnings can be distributed tax-free.²

The second applies to converted dollars withdrawn before age 59 1/2. Each conversion has a separate five-tax-year period. If the taxable portion of a conversion is withdrawn before that period ends, the 10% additional tax may apply even though income tax was already paid when the conversion occurred. The rule is designed to prevent someone from using a conversion as an immediate escape hatch from the early-distribution tax.²

For someone already over age 59 1/2, that separate conversion clock generally does not create the same 10% penalty concern because reaching 59 1/2 is itself an exception. The older investor still needs to understand the qualified-distribution clock if the plan includes withdrawing Roth earnings. For the early retiree, however, the conversion-by-conversion records are central to the spending plan.

The takeaway: a five-year period does not mean money is literally locked inside the account. It means the tax character of a withdrawal depends on age, timing, the source of the dollars, prior Roth activity, and the statutory ordering rules. Good records matter.

The best conversion window usually appears after high wages stop and before other taxable income begins. A household may retire at 58, delay Social Security until 70, and not face RMDs until 73 or 75 depending on date of birth. Those gap years can contain unusually low ordinary-income brackets. Converting during that window is like moving water through a wide part of a pipe before it narrows. The IRA balance is smaller when RMDs begin, and more of the portfolio sits in an account with no lifetime RMD for the original owner.³

A ladder can also help an early retiree who has substantial pre-tax savings but limited taxable savings. After the five-year bridge is funded, annual conversions can create a predictable stream of converted principal before age 59 1/2. The strategy can be more flexible than committing to substantially equal periodic payments under Section 72(t), although each approach has its own rules and neither should be started casually.

The strategy becomes more attractive when the current marginal rate is meaningfully below the rate expected on future withdrawals. For 2026, married couples filing jointly remain in the 22% bracket through $211,400 of taxable income and in the 24% bracket through $403,550. The standard deduction is $32,200 for joint filers, although itemized deductions and other adjustments can change the relationship between gross income and taxable income.⁴ Figure 2 shows how much wider the 22% and 24% brackets are than the lower bands.

A conversion can reduce future RMDs. Under current law, RMDs generally begin at 73 for people who reach 73 before 2033 and at 75 for people who reach 74 after 2032. Roth IRAs and designated Roth plan accounts do not require lifetime RMDs from the original owner.³ A smaller pre-tax balance can mean lower later-life taxable income, lower Medicare exposure, and more control over which account funds a large purchase.

The surviving-spouse issue is another strong argument. After the first spouse dies, the survivor usually moves from joint brackets to single brackets while much of the household's income continues. One Social Security benefit disappears, but pensions, portfolio income, and the survivor's RMD may remain substantial. Converting at joint rates can reduce the probability that the survivor later pays single-filer rates on the same retirement dollars.

Market declines can improve the mechanics. If a household intended to convert a fixed group of investments and those assets fall in value, more shares can move to the Roth for the same taxable conversion amount. A later recovery then occurs inside the Roth. This is an opportunity, not a guarantee. A conversion made before a further decline cannot be reversed under current law.⁵

Finally, a Roth can be a better legacy asset for many non-spouse heirs. Most non-spouse beneficiaries must empty an inherited retirement account within 10 years. Traditional IRA distributions generally arrive as ordinary income; qualified inherited Roth distributions generally do not. The conversion is most valuable when the owner expects heirs to face equal or higher tax rates. It is much less valuable when the likely beneficiary is a charity, which generally does not need the owner to prepay income tax on its behalf.³

Figure 2: Width of each 2026 federal ordinary-income bracket for married couples filing jointly. The 37% bracket begins above $768,700 of taxable income. Bracket room is only one input to a conversion decision.

A ladder hurts when the conversion rate is higher than the rate the same dollars would have faced later and the additional benefits do not make up the difference. Paying 32% today to avoid a well-supported 12% or 22% future rate is not tax planning simply because the destination is a Roth. It is acceleration at a premium.

It also hurts when the tax bill consumes retirement assets. A $100,000 fully taxable conversion in the 24% federal bracket creates about $24,000 of federal income tax before state tax and before any secondary effects. If $24,000 is withheld from the IRA, only $76,000 reaches the Roth. For someone under 59 1/2, the withheld amount may also be treated as an early distribution subject to the 10% additional tax unless an exception applies. Paying the tax from outside cash is generally more efficient, but it is not always prudent if doing so drains the emergency reserve or forces appreciated assets to be sold.¹

A ladder is a poor fit when the five-year bridge is underfunded. The household must carry living expenses, taxes, health-insurance premiums, home repairs, and inevitable surprises before the first rung becomes available. If the bridge fails, the investor may have to sell in a weak market, borrow at an unfavorable rate, or withdraw a conversion too early. The spreadsheet can show a lifetime tax benefit while the real plan fails on liquidity.

State residency can reverse the answer. Converting while living in a high-income-tax state shortly before moving to a state with no individual income tax may prepay a state tax that could have been avoided. The opposite can also be true if the planned destination taxes retirement distributions more heavily. State treatment is not uniform, and the conversion decision should use the law of the year and state in which the income will actually be recognized.

Short time horizons reduce the value of tax-free compounding. An older client with modest RMD exposure, low expected future rates, and heirs in low brackets may not have enough time for the Roth benefit to recover the tax paid today. A client whose estate plan leaves the IRA to charity may have even less reason to convert. The goal is not to die with the largest possible Roth IRA. The goal is to fund the household and transfer what remains efficiently.

The strategy can also hurt when the tax calculation is made too early and treated as final. Bonuses, capital-gain distributions, business income, partnership estimates, mutual-fund distributions, and year-end charitable gifts can all change the available bracket space. Because conversions completed after 2017 cannot be recharacterized back to a Traditional IRA, an oversized conversion cannot simply be undone after the return is prepared.⁵

Suppose a married couple expects $160,000 of taxable income before a conversion in 2026. On the surface, they have $51,400 of room before the 22% bracket ends at $211,400. Converting roughly that amount may be sensible. But taxable income is not the measurement used by every other rule. Medicare uses a form of modified adjusted gross income. Marketplace subsidies use household MAGI. Social Security taxation uses combined income. The senior deduction uses MAGI. Capital gains are layered on top of ordinary taxable income.

The same conversion can therefore have several marginal prices at once. The first dollar may cost 22 cents of federal income tax. A later dollar may also make part of Social Security taxable, reduce a health-insurance subsidy, eliminate a deduction, or push long-term capital gains out of the 0% band. Near a cliff, the total cost of the next conversion dollar can be much higher than the bracket printed on the tax table.

This is why we model conversions one year at a time inside a multi-year plan. The annual decision needs an estimate of wages, pension income, Social Security, interest, dividends, capital gains, charitable gifts, deductions, health coverage, and state tax. The multi-year decision needs projected account growth, withdrawals, RMDs, survivor filing status, likely residency, and the tax rates of intended beneficiaries. A ladder is a series of annual decisions, not one permanent election.

Health coverage before Medicare is often the largest hidden variable. Marketplace premium tax credits are based on household MAGI. Taxable IRA distributions increase income for this purpose, and a Roth conversion generally does the same. For 2026, eligibility for the premium tax credit again ends above 400% of the federal poverty line for the household's family size. In addition, the post-2025 rules removed the cap that previously limited repayment of excess advance credits. A conversion that pushes final income higher than estimated can reduce the credit or require full repayment of excess advance assistance.⁶ For an early retiree buying Marketplace coverage, the lost subsidy can exceed the income tax on the conversion itself.

Medicare operates on a delay. The income-related monthly adjustment amount, or IRMAA, generally uses tax-return MAGI from two years before the premium year. A 2026 conversion may therefore affect 2028 premiums.⁷ For 2026 premiums, the first IRMAA tier begins above $109,000 for a single filer and above $218,000 for joint filers. For a married couple with both spouses on Medicare, crossing the first joint threshold adds $2,296.80 of annual Part B and Part D income-related surcharges, before the underlying Part D plan premium. Higher tiers cost more, and the surcharge applies by tier rather than gradually to only the dollars above the line.⁸ Figure 3 shows the annual combined surcharge for two Medicare beneficiaries filing jointly.

Social Security creates another hidden marginal rate. The IRS tests combined income, which generally includes adjusted gross income, tax-exempt interest, and half of Social Security benefits. Benefits can begin becoming taxable above $25,000 for single filers and $32,000 for joint filers; up to 85% can be taxable above higher thresholds.⁹ While benefits are being pulled into taxable income, one additional dollar of conversion can cause as much as 85 cents of Social Security to become taxable. In a 22% bracket, the resulting federal marginal rate can temporarily approach 40.7% before state tax. The conversion is not taxed at a special rate; it is causing more income to enter the tax base.

The 3.8% Net Investment Income Tax works in a similar indirect way. A Roth conversion is not itself net investment income, but it raises MAGI. If the household also has interest, dividends, capital gains, rental income, or other net investment income, the higher MAGI can expose more of that income to the 3.8% tax once MAGI exceeds $200,000 for single filers or $250,000 for joint filers. Those thresholds are not indexed for inflation.¹⁰

Capital gains are stacked above ordinary taxable income. A conversion can use room that otherwise would have held long-term gains or qualified dividends in the 0% capital-gains band, or it can push gains into the 20% band. The conversion is still ordinary income, but its presence changes the rate applied to other income. A plan that combines conversions with gain harvesting must model both transactions together.

Clients age 65 and older have a temporary additional deduction to watch. From 2025 through 2028, an eligible person may deduct up to $6,000, or up to $12,000 for a joint return when both spouses qualify. The deduction phases out when MAGI exceeds $75,000 for single filers or $150,000 for joint filers.¹¹ A conversion can therefore reduce the deduction at the same time it creates taxable income. Medical deductions can also shrink because deductible medical expenses are subject to an AGI-based floor.

Estimated taxes and withholding are operational consequences, not footnotes. A large December conversion can create an April balance due and an underpayment penalty if withholding and estimated payments were not managed during the year. Withholding from an IRA distribution is generally treated as paid evenly through the year for federal estimated-tax purposes, which can be useful, but withholding part of a conversion also leaves fewer dollars in the Roth and may create an early-distribution issue for someone under 59 1/2. The tax-payment method should be designed with the conversion, not after it.¹²

Figure 3: Annual 2026 Part B and Part D income-related adjustment amounts for two Medicare beneficiaries filing jointly. The figures exclude standard Part B premiums and the underlying Part D plan premium. Medicare generally uses MAGI from two years before the premium year.

Start with the purpose. Is the ladder intended to fund spending before age 59 1/2, reduce future RMDs, manage a survivor's tax exposure, leave a better asset to heirs, or create general tax diversification? A strategy without a specific job tends to grow simply because the current bracket has room.

Next, price the bridge. Count the years until the first converted dollars are available under the applicable rules. Then stress-test the non-Roth resources against a bear market, higher health premiums, home repairs, and a tax bill larger than expected. A ladder that requires five perfect years is not adequately funded.

Estimate the full marginal cost. That includes federal ordinary income tax, state tax, lost Marketplace credits, future IRMAA, Social Security interactions, NIIT on other income, capital-gains effects, lost deductions, and the opportunity cost of the cash used to pay tax. The relevant comparison is not today's bracket against a guessed future bracket. It is today's all-in cost against the expected all-in cost of leaving the dollar pre-tax.

Review every pre-tax IRA. If the owner has made nondeductible IRA contributions, Form 8606 basis is generally allocated across the aggregate value of Traditional, SEP, and SIMPLE IRAs. A client usually cannot select only the after-tax dollars and call the conversion tax-free. Missing basis records can cause tax to be paid twice; assuming basis is isolated can understate the tax due.⁵

Decide which assets will move and how the tax will be paid. A trustee-to-trustee conversion, completed in kind when appropriate, can avoid time out of the market. Outside cash generally preserves more retirement capital, but the reserve should remain sufficient. The investment allocation inside the Roth should fit the household's total portfolio rather than treating the Roth as a separate bet.

Finally, define the annual stop signs before converting: the top of a chosen tax bracket, a Marketplace subsidy boundary, an IRMAA tier, the NIIT threshold, a capital-gains objective, or a minimum cash-reserve level. Those limits may conflict. When they do, the plan should state which one controls and why.

At Perissos, we view a conversion ladder as a multi-year income plan, not an annual tax trick. We map the working years, early-retirement bridge, Social Security start date, Medicare enrollment, RMD age, likely survivor years, and intended legacy. Then we test a range of conversion amounts rather than assuming the top of a bracket is automatically optimal.

The analysis is tax-aware, not tax-driven. A lifetime model can prefer a conversion and still be wrong for the client if it leaves too little accessible cash, creates anxiety during a market decline, or makes the household dependent on assumptions that cannot be controlled. Liquidity and flexibility are part of the return.

We also coordinate the execution. The investment adviser can model the portfolio and conversion path, but the CPA should confirm the tax return, basis, estimated payments, and state treatment. An estate attorney may need to review beneficiaries and trust provisions. For clients using Marketplace coverage or approaching Medicare, the health-insurance consequences deserve the same attention as the federal bracket.

The best ladders are reviewed late enough in the year to have credible income estimates but early enough to execute carefully. Partial conversions can be staged during the year and adjusted as the facts develop. The goal is not to predict tax law perfectly. It is to retain more control over when income is recognized while avoiding the cliffs we can already see.

Roth conversion ladders can be powerful. They can turn pre-tax retirement savings into an early-retirement income source, reduce future RMDs, protect a surviving spouse from narrower brackets, and create a more flexible pool of tax-free assets. They are especially useful when retirement opens a genuine low-income window and the five-year bridge is already funded.

They can also hurt. A conversion is irreversible, the tax is due now, and the income can reach into health-insurance subsidies, Medicare premiums, Social Security taxation, investment-income tax, capital-gains rates, deductions, and state tax. Near one of those thresholds, the printed tax bracket can be the least important number on the page.

The takeaway is simple: build the ladder from the spending plan backward. Decide what the Roth dollars need to do, confirm that the bridge can carry the household, calculate the all-in cost of each rung, and revisit the amount every year. That is how a Roth conversion ladder becomes a planning tool instead of an expensive habit.

All my best,

Brandon VanLandingham, CFA, CMT, CFP

Founder / CIO

Reducing Capital Gains on a Highly Appreciated Portfolio

Net Investment Income Tax (NIIT): What Triggers It and How to Plan

[1] Internal Revenue Service, Publication 590-A (2025), Contributions to Individual Retirement Arrangements, "Converting From Any Traditional IRA Into a Roth IRA" (taxable conversion income; required distributions cannot be converted), https://www.irs.gov/publications/p590a.

[2] Internal Revenue Service, Publication 590-B (2025), Distributions from Individual Retirement Arrangements, "What Are Qualified Distributions?," "Distributions of conversion and certain rollover contributions within 5-year period," and "Ordering Rules for Distributions," https://www.irs.gov/publications/p590b.

[3] Internal Revenue Service, Internal Revenue Bulletin 2026-06, Section III.2 (RMD applicable ages 73 and 75; no lifetime RMDs from designated Roth accounts); IRS, Retirement plan and IRA required minimum distributions FAQs (no lifetime RMDs for Roth IRAs and designated Roth accounts; 10-year rule for most non-spouse beneficiaries), https://www.irs.gov/irb/2026-06_IRB and https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs.

[4] Internal Revenue Service, Working Families Tax Cuts - Individuals and workers, tax year 2026 standard deductions and marginal-rate thresholds, https://www.irs.gov/newsroom/working-families-tax-cuts-individuals-and-workers.

[5] Internal Revenue Service, Instructions for Form 8606 (2025) (Traditional, SEP, and SIMPLE IRA basis reporting; no recharacterization of conversions made in 2018 or later), https://www.irs.gov/instructions/i8606.

[6] Internal Revenue Service, Questions and Answers on the Premium Tax Credit, updated February 19, 2026 (taxable retirement distributions can change household income; no excess advance-credit repayment cap after 2025); IRS, Publication 505 (2026) (PTC unavailable above 400% of the federal poverty line for 2026), https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit and https://www.irs.gov/publications/p505.

[7] Social Security Administration, SSA Handbook Section 2504: Description of the Medicare Income-Related Monthly Adjustment Amount Determination Process (SSA generally requests MAGI from the tax year two years before the premium year), https://www.ssa.gov/OP_Home/handbook/handbook.25/handbook-2504.html.

[8] Centers for Medicare & Medicaid Services, 2026 Medicare Parts A & B Premiums and Deductibles, November 14, 2025 (2026 Part B and Part D IRMAA thresholds and amounts), https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles.

[9] Internal Revenue Service, Publication 17 (2025), Your Federal Income Tax, Social Security benefits base amounts and taxable-benefit rules, https://www.irs.gov/publications/p17.

[10] Internal Revenue Service, Topic No. 559, Net Investment Income Tax (3.8% rate and $200,000 single / $250,000 joint MAGI thresholds); IRS, Questions and Answers on the Net Investment Income Tax (thresholds are not indexed), https://www.irs.gov/taxtopics/tc559 and https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax.

[11] Internal Revenue Service, Check your eligibility for the new enhanced deduction for seniors, February 27, 2026 (2025-2028 deduction and $75,000 single / $150,000 joint MAGI phaseout thresholds), https://www.irs.gov/newsroom/check-your-eligibility-for-the-new-enhanced-deduction-for-seniors.

[12] Internal Revenue Service, Publication 505 (2026), Tax Withholding and Estimated Tax, https://www.irs.gov/publications/p505.

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