How it works
- Roll the old 401(k) into a traditional IRA if it is not there already.
- Each year, convert a slice of the IRA to a Roth IRA. You pay ordinary income tax on the amount converted, but no penalty.
- Wait five years. After that the converted amount can be withdrawn tax-free and penalty-free at any age.
- Repeat every year so a new rung matures every year.
The five-year rule
Each conversion has its own five-year clock, and the clock starts on January 1 of the year you convert. A conversion made in December counts as if it were made in January, so late-year conversions lose nothing. Withdraw only the converted principal. Leave the earnings alone; they come out tax-free only once you are 59½ and your first Roth IRA is at least five years old. Before that, earnings are taxable and penalized.
Regular Roth IRA contributions are different. They can be withdrawn at any time, which makes them useful for bridging the first five years.
Filling the 12% bracket
The point is to pay tax at a lower rate than you skipped when you contributed. For 2026 the 12% bracket ends at $50,400 of taxable income for a single filer and $100,800 for a married couple filing jointly. Taxable income is what is left after the standard deduction ($16,100 single, $32,200 joint), so with no other income a single filer can convert $66,500 and a couple $133,000 before reaching the 22% bracket.
Example: married, no other income, convert $133,000. After the $32,200 standard deduction, taxable income is $100,800. Tax is 10% on the first $24,800 ($2,480) plus 12% on the next $76,000 ($9,120), about $11,600 in total, or 8.7% of the amount converted.
Dividends, interest, and a spouse's wages use up bracket space before the conversion does. Long-term gains stack on top, so a large conversion can push gains that would have been taxed at 0% into the 15% rate. The ACA credit matters too: for 2026 it disappears above 400% of the federal poverty level, which is $84,600 of MAGI for a couple, well below the $133,000 above. If you need the credit, that is your real ceiling.
Before you start
- About five years of spending in taxable accounts, Roth IRA contributions, or cash to cover the gap before the first rung matures.
- A record of every conversion with its date and amount. Form 8606 reports conversions, but keep your own file.
- A plan for state income tax, which most states charge on conversions.