Dan retired from a regional Social Security office at 57 with 31 years of service. His FERS pension came to about $50,000 a year, plus a supplement of around $18,000 until 62. He and his wife had $900,000 sitting in the traditional TSP and no plan to touch it. Then a friend asked him a simple question: "What happens to that balance when you hit required minimum distributions?"

Dan ran the numbers. At 75, with the account grown and a full pension, plus Social Security for two, he'd likely be pushed into a higher bracket for the rest of his life. He had a window of low-income years and no idea he was wasting it.

That window is what a Roth conversion ladder is built to use.

What the ladder actually is

A conversion ladder is a repeating habit, not a single trick. Each year you move a chosen slice of pre-tax money into a Roth account and pay ordinary income tax on that slice. You do it again next year, and the year after. Each annual conversion is a "rung."

Two things make the ladder useful:

  • Tax smoothing. You fill up lower brackets now so you aren't forced into higher ones later.
  • Penalty-free access. If you're under 59½, each converted amount has its own five-year clock. Once that clock runs, you can withdraw that rung's converted principal without the 10% early withdrawal penalty. Earnings are a different matter.

For many retirees the access piece gets all the attention. For federal retirees, the smoothing piece usually matters more, and I'll explain why below.

The federal wrinkles

Federal retirees have options that private-sector retirees often lack, and a few quirks to watch.

TSP or IRA?

Since early 2024, the TSP has allowed in-plan Roth conversions, moving traditional TSP money to the Roth side of the same account. You keep the TSP's famously low expenses and skip the rollover. The tax bill is generally paid from money outside the account, so confirm current mechanics and limits at tsp.gov.

The alternative is rolling traditional TSP money into a traditional IRA, then converting to a Roth IRA. That gives you more investment choices and flexibility on timing and amounts. The cost is leaving the TSP's expense ratios behind and, in some cases, the G Fund, which has no real equivalent outside the TSP.

Here is the part people miss. The ladder's five-year clocks are a Roth IRA concept. If you're over 59½, they don't matter for the penalty. If you're under 59½, the TSP offers its own relief valve: separate from service in or after the year you turn 55 (50 for certain law enforcement, firefighter and similar roles) and you can take TSP withdrawals without the 10% penalty. Many federal retirees can simply draw on the TSP if they need cash, so they don't need the ladder for access at all.

The pro rata trap

If you hold other traditional IRA money, especially with after-tax basis from nondeductible contributions, the IRS treats all your traditional IRAs as one pot when you convert. You can't pick the "clean" dollars. TSP balances are not counted in that calculation while they remain in the TSP. Rolling them into an IRA changes the math, which matters if you rely on backdoor Roth contributions. Check this before you move a dollar.

Sizing the rung

The goal isn't to convert as much as possible. It's to convert as much as you can at a rate lower than what you expect to pay later.

Back to Dan. His joint taxable income after the standard deduction is roughly $37,000. Federal brackets and the standard deduction adjust every year, so check irs.gov for current numbers, but in a recent year the 12% bracket for joint filers ran to nearly $100,000 of taxable income. That left Dan with something like $60,000 of room at 12%.

If he converts $60,000, he owes roughly $7,000 to $7,500 in federal tax (state tax varies). Do that for several years and he's moving hundreds of thousands of dollars out of the RMD pile at a modest rate. Compare that with the 22% or 24% those same dollars might face at 75, when pension, Social Security and forced withdrawals stack together.

He could also deliberately fill part of the 22% bracket. The right target depends on his projected future income, not just today's. A rough projection spreadsheet, or an hour with a fee-only planner, pays for itself here.

Where conversions bite back

Conversion income counts as income. That has side effects people don't see coming.

  • Medicare IRMAA. Premium surcharges are based on income from two years earlier. A big conversion at 63 can raise your Medicare premiums at 65. The thresholds are sharp cliffs, so a dollar over can cost real money.
  • Social Security taxation. Higher income can make more of your benefit taxable once you're claiming.
  • Other credits and deductions. Some phase out as income rises.
  • No undo. Conversions can't be reversed. If markets drop right after you convert, you've paid tax on a value that no longer exists. Spreading conversions across years, and converting after a dip rather than before one, softens this.
  • Cash for the tax bill. If you pay the tax from the converted money itself, you lose some of the benefit, and under 59½ you may owe a penalty on the withheld part. Use cash from savings or a taxable account if you can.

A simple annual routine

Most successful ladders are boring. Here is the version I'd suggest.

  1. Project your income for the year: pension, supplement, interest, dividends, any part-time pay.
  2. Pick a ceiling such as the top of a bracket or an IRMAA threshold, then calculate the room underneath.
  3. Convert in pieces, or late in the year once your income is clearer, rather than in one January lump.
  4. Set aside the tax and account for it in estimated payments or withholding from your pension.
  5. Track each conversion by year, especially if you're under 59½. Form 8606 and your 1099-R records are the paper trail.

Who should skip it

A ladder isn't for everyone. If you expect lower income later than you have now, converting may cost you. If your pension is large enough that you're already in a high bracket today, the math may not work. If you plan to leave most of your savings to charity, traditional dollars are often the better gift, since charities don't pay income tax. And if you can't pay the tax from outside the account, hold off.

The cleanest candidates are early retirees with a gap between leaving federal service and the start of Social Security and RMDs. Those years of relatively low income are the cheapest time to buy tax-free growth.

Dan ended up converting about $55,000 a year through age 62, then reassessing when his supplement ended and Social Security came into view. It isn't glamorous. It's a few hours of planning each fall, and it changes what his 75-year-old self will owe.