When should I do a Roth conversion?
Convert Traditional IRA/401(k) to Roth during years when your income is unusually low — early retirement before Social Security, sabbaticals, or gap years. Fill up the 10% and 12% brackets ($0–$47,150 single in 2024) with conversions, paying minimal tax on money that then grows tax-free forever.
Formula
Annual Conversion Amount = Top of 12% bracket − Other Taxable Income
Example
Retired at 45, no earned income. Standard deduction $14,600 + 12% bracket tops at $47,150 = convert $61,750/year paying only $4,738 in tax (7.7% effective rate) on money that would have been taxed at 22%+ via RMDs at 73.
How it works in detail
A Roth conversion ladder is the FIRE community's most powerful tax strategy. In early retirement (before claiming SS at 62–70), your taxable income drops to near zero. Each year, convert enough Traditional IRA money to fill the low brackets — you'll pay 10–12% tax instead of the 22–32% you avoided when contributing. After 5 years, each conversion becomes accessible penalty-free. This effectively moves money from 'taxed at 22%+ in retirement via RMDs' to 'taxed at 10–12% now and never taxed again.' The optimal conversion amount varies by year depending on other income, capital gains harvesting, and ACA subsidy cliffs.
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What is the 4% rule for retirement?
The 4% rule says you can withdraw 4% of your portfolio in year one of retirement, adjust for inflation each year, and have a 95%+ probability your money lasts 30 years. It comes from William Bengen's 1994 research, later confirmed by the Trinity Study (1998).
Should I choose Roth or Traditional IRA?
Choose Roth if you expect higher taxes in retirement (younger, income will grow, or tax rates rise). Choose Traditional if you're in a high bracket now and expect lower taxes later. For most accumulating workers under 50 in the 22–24% bracket, Roth is preferred because of tax-free growth and no Required Minimum Distributions.
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