Does the conversion ladder only work if you actually retire early? I know the goal of any early retirement blog is to just that, retire early, but if it doesn't happen is the conversion ladder still a viable strategy?
The conversion ladder is only
necessary if you retire early. It's a strategy to gain access to tax-deferred money without paying early-withdrawal penalties. If you retire at a "normal" age, there are no early-withdrawal penalties, so no need to employ the conversion strategy.
I think then what you're really asking is "if I don't plan to retire early, should I put my money in a Traditional IRA or a Roth IRA?"
That depends, as always, on what your current marginal tax rate is now vs. what you expect your average tax rate to be when you take distributions. The Traditional is the better choice when the first number is larger than the second.
For an MMM-style early retiree, the first number will almost always be larger than the second, because they will go from relatively high income during their working years to extremely low income during their retirement years. For a normal retiree, the answer is less clear, and depends on how enormous you expect your stash to grow; will the income it generates exceed the yearly income from your working years?
Certainly the
option will still exist to convert Traditional to Roth in retirement or any other time (assuming laws don't change), but it will depend on your income levels and goals at the time to determine if that would be beneficial.
The general idea is that it's nice to get money in a Roth account at times when your tax rate is low (i.e., when your income is low). For a young worker this can be through direct contributions early in their career when they have a low salary. For an early-retiree, it can be through conversions because their salary is $0. Otherwise, when your tax rate/income is relatively "high", your money should go into/stay in a Traditional account.
I have a good bit of money in traditional IRAs, but when tax time comes along, I calculate how much I can move into a Roth without incurring any tax liability.
How do you do this? Doesn't any conversion amount raise your AGI, and thus, incur tax liability?