I want to break down the mechanics of the Roth conversion ladder for people planning early retirement.

The problem: you want to retire early, but your money is in retirement accounts you can't access without a 10% penalty until age 59.5. The Roth IRA has a special rule: contributions can be withdrawn at any time, but conversions must season 5 years before penalty-free withdrawal.

The strategy: starting 5 years before you plan to need the money, convert a portion of traditional retirement funds to Roth each year. You pay income tax on the conversion in that year, but after 5 years those converted funds can be withdrawn tax-free and penalty-free.

For someone retiring at 45: start conversions at 40 (or earlier), converting enough each year to meet expected spending needs from ages 45-59.5 (when the accounts become freely accessible). Each year's conversion becomes available exactly 5 years later.

The optimal conversion amount is the maximum you can convert while staying in a low income tax bracket. In early retirement years before Social Security, income may be low enough to convert at 12% or even 0%.