A Beginner’s Guide to Roth IRA Laddering

In retirement, you may want to consider a Roth IRA laddering strategy to minimize taxes on your withdrawals. Roth IRA laddering involves converting funds from a traditional IRA to a Roth IRA over time. While some funds in your traditional IRA may be tax-deductible, others may not. This can make the Roth laddering process more complex.

What is the Pro Rata Rule?

The pro rata rule applies to Roth conversions. It means that when you convert funds from a traditional IRA to a Roth IRA, the IRS will calculate the portion of your conversion that is taxable based on the ratio of your non-deductible contributions to your total IRA balance.

For example, if you have $250,000 in your traditional IRA, of which $65,000 is non-deductible, and you convert $100,000, the taxable portion of your conversion would be $26,000 (65,000 / 315,000 100,000).

How Does Roth Laddering Work?

Roth laddering involves converting a small portion of your traditional IRA to a Roth IRA each year. This allows you to spread out the tax liability associated with the conversion and potentially reduce your overall tax bill.

For example, if you have $300,000 in your traditional IRA and you retire at age 60, you could convert $10,000 per year to a Roth IRA. The taxable portion of your conversion would be $3,182 (65,000 / 365,000 10,000).

Benefits of Roth Laddering

Tax-free withdrawals in retirement: Roth IRAs grow tax-free, and withdrawals in retirement are also tax-free.
Reduced tax liability: By converting funds from a traditional IRA to a Roth IRA over time, you can reduce the amount of taxes you pay on your withdrawals.
Flexibility: You can adjust your Roth laddering strategy as needed to meet your financial goals.

Considerations

Income limits: There are income limits for Roth IRA conversions. If your income exceeds the limits, you may not be able to convert funds to a Roth IRA.
Tax implications: You will pay taxes on the portion of your conversion that is taxable.
Age: You must be at least 59½ to withdraw funds from a Roth IRA without paying a penalty.

If you are considering a Roth IRA laddering strategy, it is important to speak with a qualified financial advisor to ensure that it is the right strategy for you.