Roth individual retirement account conversions are a popular way to reduce future levies on pretax 401(k) or IRA withdrawals — and you can smooth out the upfront tax hit with a “Roth conversion ladder,” experts say.
Roth conversions transfer pretax or nondeductible IRA money to a Roth IRA, which offers future tax-free growth. The trade-off is regular income taxes incurred that year on the converted balance.
By comparison, a Roth conversion ladder is a series of conversions over multiple years, meaning “you’re paying taxes in smaller increments,” said certified financial planner Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin.
Roth conversion ladders are a “strategic and tactical approach” involving years of tax projections, including future withdrawals, said Ashton Lawrence, CFP and director at Mariner Wealth Advisors in Greenville, South Carolina.
For example, rather than converting $200,000 from pretax to Roth in a single year, you may break that into chunks over several years, depending on your income. Of course, boosting your adjusted gross income any year can trigger other tax consequences, such as phaseouts for certain tax breaks.
“It’s not a one-time planning engagement” because you need to revisit the planned conversions every year and adjust as needed, Lawrence said.