Roth Conversion Ladders in Low-Income Years (Between Jobs, Sabbatical, Pre-Social-Security)
A year of low earned income is a gift for Roth conversions. Fill the 12% and 22% brackets with pre-tax IRA dollars and compound them tax-free for decades.
A Roth conversion takes pre-tax IRA dollars, declares them as ordinary income in the current year, and moves them to a Roth IRA where they grow tax-free forever. The question is always the same: what rate do I pay today versus what rate would I pay at withdrawal?
For senior ICs with heavy RSU-driven W-2 income, conversions during working years almost never make sense. You’re already in the 32% or 35% bracket. Adding more ordinary income at 32% to save future tax at 32% is break-even at best.
Low-income years flip the math. If you’re between jobs for six months, on a year-long sabbatical, or retired but waiting to claim Social Security at 70, your marginal bracket can drop to 12% or 22%. Converting $100K at 22% to withdraw later at 32% is a 10-percentage-point win.
What counts as a low-income year
Three common scenarios:
Between jobs. A senior IC with a July departure and a December start has five months of zero W-2 income. Their annual wages might be $260K instead of $520K. Depending on RSU vesting in the old-job stub period, ordinary income might land in the 24% bracket instead of 35%.
Sabbatical. A planned 12-month break. W-2 income drops to near zero. Only deferred comp, dividend income, and interest remain. Marginal bracket often 12-22%.
Pre-Social-Security retirement. Retired at 62 but waiting until 70 to claim SSA. Years 62-70 have no earned income, no Social Security, possibly some pension. AGI can be kept at $60K-$120K. Rates 12-22%.
All three are conversion windows. The longer the window, the more you can convert.
Mechanics of the conversion
The conversion itself is a single Form 8606 transaction. You tell the IRA custodian to move $X from traditional IRA to Roth IRA. The custodian issues a 1099-R coded as a conversion. You report the gross amount as ordinary income on Form 1040 and pay tax with the return.
No 60-day rollover limit applies to conversions. No income limit caps them. You can convert $0 to $10M in a single year if you want, subject to tax consequences.
Post-conversion, the converted amount has a 5-year clock for the 10% early-withdrawal penalty. If you’re over 59½, the 5-year clock is moot for penalty purposes.
Sizing the conversion
The standard approach: fill the bracket up to but not past the top of your target bracket. For 2025 single filers, the 22% bracket goes up to $103,350 of taxable income. For married filing jointly, it goes to $206,700. Above those thresholds, the rate jumps to 24%.
If your baseline AGI is $40K, you have $63K of headroom in the 22% bracket (single). You convert exactly $63K and pay 22% on the conversion while leaving the 24% bracket untouched.
Some retirees are more aggressive: fill the 24% bracket ($197,300 single / $394,600 married in 2025). The logic is that future withdrawals are likely to be 32% or higher after RMDs kick in, so 24% today is still a win.
Five-year ladder construction
For retirees under 59½, the classic Roth ladder converts a slice each year and waits 5 years before withdrawing. Each converted slice becomes accessible without penalty 5 years after its conversion date.
Example for someone retiring at 55:
- Year 1 (age 55): Convert $80K, tagged with a 5-year clock to age 60
- Year 2 (age 56): Convert $80K, tagged to age 61
- Year 3 (age 57): Convert $80K, tagged to age 62
- …continues through age 59
- Age 60: First slice available for penalty-free withdrawal
Since the retiree also turns 59½ during the ladder, the clocks often become moot. The ladder strategy is most useful for FIRE-style retirees in their 40s and early 50s.
Pro-rata rule on post-tax IRA basis
If you have any after-tax basis in traditional IRAs, typically from non-deductible contributions or after-tax 401(k) rollovers, the pro-rata rule under IRC §408(d)(2) treats all IRAs as one pool. A partial conversion recovers basis pro-rata, not all basis first.
Example: $500K pre-tax IRA + $50K basis = $550K total. Converting $55K recovers $5K basis and taxes $50K. This can’t be gamed, you can’t convert “only the basis.”
Strategies to work around pro-rata:
- Roll pre-tax IRA balance into current 401(k) before converting (isolates basis)
- Convert the entire IRA in one year to eliminate the issue prospectively
IRMAA implications two years out
Conversion amounts count toward MAGI, which feeds Medicare IRMAA surcharges two years later. For 2025, IRMAA tier 1 starts at $106K MAGI single / $212K MAGI married. A $150K conversion at 65 could lift Part B and Part D premiums at age 67 by $2,000-$4,000 annually.
For retirees 63-65, conversions should model both the tax savings and the IRMAA cost. Sometimes the right answer is smaller conversions spread over 5 years to stay below IRMAA tier 1.
State tax considerations
The conversion is taxed in the state of residence at the time of conversion. A retiree converting in California (13.3% top rate) pays state tax on the conversion. The same retiree converting after a move to Nevada or Florida pays zero state tax.
This makes the conversion-plus-move sequence powerful for California-resident retirees: move to a no-tax state first, then convert. The move has to be genuine (see trailing-nexus rules for earned income; pension/IRA withdrawals are generally sourced to residence state under federal preemption in 4 U.S.C. §114).
Frequently asked
Is there a contribution limit on Roth conversions? No. The $7,000 IRA contribution limit under IRC §408 applies to new contributions. Conversions are a separate mechanism and are uncapped.
Can I undo a conversion if the market drops after? No. The Tax Cuts and Jobs Act eliminated recharacterizations of conversions starting in 2018. Once converted, the amount is taxable and cannot be reversed.
Should I convert everything or stop at the bracket threshold? Depends on the gap between your conversion rate and your expected withdrawal rate. If conversion is at 22% and future RMDs will be taxed at 32%, converting well past the 22% ceiling can still be a win.
What about Social Security taxation? Once you claim Social Security, up to 85% of the benefit becomes taxable based on provisional income. Conversions increase provisional income and can push more of SSA into the taxable range. Pre-SSA conversion years avoid this entirely.
Does the §6501 three-year statute apply to conversions? Yes, the normal assessment period starts with the filing date. Keep conversion-year records, Form 8606, 1099-R, basis tracking, permanently. Future partial withdrawals depend on clean basis records.
Retirement planner for tech employees approaching a 55-to-62 retirement window with most of their net worth in employer stock. Reviews VestedGrant's retirement content.
Find a fiduciary advisor who understands equity compensation
Short form. We match you with up to three fee-only advisors who routinely work with RSUs, ISOs, and pre-IPO equity.
- retirementMega-Backdoor Roth: The After-Tax 401(k) Strategy for RSU-Heavy Earners
RSU-heavy earners can push ~$46,000 of after-tax dollars into a Roth through the mega-backdoor, here's how the plan mechanics work and who qualifies in 2025.
Read more - retirementAsset Location: Roth vs Traditional for Equity-Heavy Savers
Where you hold each asset class matters almost as much as what you hold. For equity-heavy savers, asset location between Roth, traditional, and taxable accounts can shift after-tax wealth by 15-20%.
Read more - retirementRetirement Math When 60% of Your Net Worth Is Your Employer
Sequence-of-returns risk, sustainable withdrawal rates, and the Roth conversion moves for households whose retirement rides on one stock.
Read more - retirementRoth Conversion Ladders When Equity Distorts Your Income
How to use low-income years between tech roles or before Social Security to convert traditional IRA dollars to Roth at lower effective rates.
Read more - retirementSafe Withdrawal Rates With Equity Volatility: Why the 4% Rule Needs Adjustment
The 4% rule was built on diversified 60/40 portfolios and historical U.S. returns. Equity-heavy retirees need to adjust, sometimes down to 3% or less.
Read more - retirementNet Unrealized Appreciation (NUA) from 401(k) Employer Stock at Retirement
If your 401(k) holds company stock purchased at low prices, NUA under IRC §402(e)(4) can convert most of the gain into long-term capital gains instead of ordinary income.
Read more