Monthly Archives: June 2026

Roth IRA Distributions in Early Retirement

I recently presented “Back to the Future: Is Your FI Journey Stuck in 2017” for the ChooseFI Los Angeles chapter–coming soon to the San Diego ChooseFI chapter!

It struck me that back in 2017, most in the Financial Independence community would have said “let that Roth IRA grow tax free for as long as possible!”

Is that wise in 2026? 

I believe that for some early retirees, spending Roth IRAs in early retirement may be the optimal path. Cody Garrett explored this in our recent book, Tax Planning To and Through Early Retirement. 

I figure it is good to explore this topic in additional depth on my blog. An example will illustrate just how powerful Roth IRA withdrawals can be for some early retirees. 

Funding Year-End Expenses in Early Retirement

Picture Linus and Sally. Both turn 58 in 2026. They are retired, live in San Diego, California, and have no dependents. Linus and Sally are on the “Second Lowest Cost Silver Plan” all year as their ACA medical insurance. 

Through November 2026 they fund their living expenses by selling mutual funds in their taxable account. These sales, through November, have triggered $70,000 of capital gains. They also estimate that by the end of the year they will have $10,000 of total interest and dividend income.

Linus and Sally need $10,000 to fund their December living expenses. They are considering two options for getting that $10,000 from their portfolio.

Option 1 is selling $10,000 of mutual funds taxable accounts. This sale would trigger a $6,000 long-term capital gain. 

Option 2 is withdrawing $10,000 from one of their Roth IRAs. Due to having previously made annual contributions to Roth IRAs (and/or having done the Backdoor Roth IRA), they have plenty of accessible Roth IRA basis such that the $10,000 withdrawal would be entirely tax and penalty free. 

Which option should Linus and Sally choose to fund their December expenses?

The Premium Tax Credit

Linus and Sally are subject to three “taxes” that function like an income tax. They are:

  • Federal income tax
  • California state income tax
  • Premium Tax Credit

To be clear, the Premium Tax Credit is not a tax. Rather, it is a mechanism to run a personal expense (medical insurance premiums) through the Internal Revenue Code.

As a result, the Premium Tax Credit behaves very much like an income tax.

However, there is one feature of the Premium Tax Credit that we must consider in additional detail: the 400% of federal poverty level cliff. 

For Americans with income from 138 percent of the federal poverty level up to and through 400% of the federal poverty level, the Premium Tax Credit functions largely like an income tax. As income rises, the Premium Tax Credit is ratably and progressively reduced. However, the second one has income a dollar more than 400 percent of the federal poverty level, the Premium Tax Credit plunges (goes off the cliff) to $0. 

For a married couple, this could easily mean the loss of over $10,000 of Premium Tax Credits.

The 2026 return of the 400% of federal poverty level cliff means that Roth IRA withdrawals in early retirement are more important than ever!

Roth IRA Distributions and the Premium Tax Credit

Let’s explore the results when Linus and Sally pursue Option 1. This funds their December expenses with the sale of $10,000 of brokerage account mutual funds. It trips a capital gain of $6,000.

After this capital gain, Linus and Sally have an adjusted gross income (and MAGI) of $86,000, consisting of $70,000 of prior capital gains, $10,000 of interest and dividends, and the December capital gain of $6,000.

At $86,000 of MAGI, Linus and Sally qualify for no Premium Tax Credit, as their MAGI is 407 percent of the federal poverty level. 

If, instead, Linus and Sally fund their December living expenses with a $10,000 Roth IRA distribution, their adjusted gross income and their MAGI is $80,000 ($70,000 of capital gains plus $10,000 of interest and dividends). This leaves their income at 378 percent of the federal poverty level. 

At this level of income, Linus and Sally qualify for a $15,469 Premium Tax Credit. 

Roth Distribution Optimization

Option 2 is a Roth Distribution optimization play. 

In Linus and Sally’s 70s and 80s, it may be the case that a Roth distribution avoids a 24% or 32% federal income tax. That’s a good Roth distribution outcome.

But the $10,000 December Roth IRA distribution in 2026 avoids an effective federal tax of 257.82 percent!

Isn’t that the best time to take a Roth distribution?

Maximizing Premium Tax Credits with Roth IRA Distributions

It’s time to start thinking about ways to optimize Roth distributions. Enrollment in an ACA medical insurance plan may be the time to optimize Roth IRA distributions. ACA enrollees are subject to potential federal and state income taxes and potential diminution of the Premium Tax Credit.

What makes the diminution of the Premium Tax Credit issue particularly compelling in 2026 and beyond is the return of the 400 percent of federal poverty level cliff for Premium Tax Credits. 

For many of those retired prior to age 65, controlling income to avoid the 400 percent of federal poverty level cliff has become a compelling planning objective. Going off the cliff can easily cost a married retired couple $10,000 or more in Premium Tax Credits.

Having a tax free source to draw upon for living expenses in the early stages of an early retirement might be much more important than having a tax free source to draw upon later in retirement, as Linus and Sally’s example illustrates. 

Additional Resources

The taxation of “early” Roth IRA distributions tends to be very favorable. I blogged about the tax treatment of Roth IRA distributions in these two articles. 

Roth IRA Withdrawals

The Taxation of Roth IRA Distributions

Conclusion

Who doesn’t love a large tax free balance in a Roth IRA? Nevertheless, it is important to remember that balance exists to support retirees.

For many retirees, particularly those on an ACA medical insurance plan, the Roth IRA may best support them in the early part of their early retirement. 

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn at @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, legal, investment, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.

Can You Find the Hidden Roth IRA?

Perhaps you have a Hidden Roth IRA.

You might be thinking “No way. I did not lose track of a Roth IRA!”

The Hidden Roth IRA is not a lost retirement account. 

Rather, the Hidden Roth IRA is a Roth IRA that hides inside traditional IRAs and traditional 401(k)s. 

How can a Roth IRA hide in a traditional retirement account? It turns out tax free distributions (essentially, a Roth IRA) from traditional retirement accounts occur more often than you would think.

This article searches for Hidden Roth IRAs. You’ll be surprised how often retirees can benefit from the Hidden Roth IRA.

The Standard Deduction and the Hidden Roth IRA

We live in an era of a rapidly growing standard deduction. 

The standard deduction is to the Hidden Roth IRA what the flux capacitor is to time travel. 

The standard deduction makes the Hidden Roth IRA possible!

Increasing the standard deduction, as the One Big Beautiful Bill did, greatly expanded the Hidden Roth IRA. 

It gets even better. Through 2028, the senior deduction expands the Hidden Roth IRA for many age 65 and older. The new nonitemizers’ charitable deduction effectively increases the standard deduction by $1,000 per person for Americans with some charitable inclinations. 

Senator Cory Booker has recently proposed a significant increase in the standard deduction which would help many retirees enjoy the benefits of the Hidden Roth IRA.

Golden Years Hidden Roth IRAs

The “prime time” of the Hidden Roth IRA is one’s mid-to-late 60s, particularly the 66th through 69th birthday years.

In today’s environment, a married couple in their mid-to-late 60s could take more than $45,000 annually from traditional IRAs and have the “taxable” income fully offset by the available standard deduction, additional standard deduction, senior deduction, and potentially the nonitemizers’ charitable deduction. 

During the Golden Years, there are no required minimum distributions (RMDs). There’s no Premium Tax Credit on the table, so controlling income for PTC optimization is not a consideration. Further, Social Security can be delayed until age 70, resulting in increased annual payments, potentially reducing volatility in one’s 70s and 80s. 

Yes, the Golden Years Hidden Roth IRA mostly or fully goes away once the couple claims Social Security. Social Security benefits are ordinary income that soak up the standard deduction and senior deduction, reducing or fully eliminating their ability to shield traditional IRA/401(k) distributions from federal income taxation. Nevertheless, for multiple years of one’s retirement well into five figures can come out of traditional IRAs as a tax free Hidden Roth IRA. 

The Golden Years Hidden Roth IRA is the best Hidden Roth IRA, in my opinion. But it’s not the only Hidden Roth IRA. 

72(t) Payment Plans and the Hidden Roth IRA

Some retirees will get a jump start on the Hidden Roth IRA. Early retirees starting a 72(t) payment plan naturally tend to get the benefit of the Hidden Roth IRA.

Prior to the One Big Beautiful Bill, I did a YouTube video about this concept using the then-current 2025 numbers. Even prior to the OBBB expansion of the standard deduction, a married couple on a 72(t) payment plan could have more than $25,000 a year in a Hidden Roth IRA.

72(t) payment planning naturally marries with the Hidden Roth IRA. In most cases, I strongly favor mostly or fully spending down taxable account assets prior to initiating a 72(t) payment plan. Having spent down the taxable assets, it’s difficult for early retirees to incur significant income other than the 72(t) payment itself. 

This naturally clears the path for the 72(t) payment to enjoy the benefit of the Hidden Roth IRA. Those benefits can last for the better part of two decades in an extreme case such as the one posited in this YouTube video. 

Married Couples Taking RMDs

In today’s environment, many taking RMDs will enjoy the Hidden Roth IRA. Why?

Most 70-something and 80-something’s main sources of income are Social Security and retirement account distributions. 

Let’s consider average and median wealth and income statistics. The average monthly Social Security benefit, as of January 2026, is $2,071. Multiply that by 12 months and 2 spouses and you get $49,704 in Social Security per year. 

Median retirement account balances for those 75 and older as of 2022 was just $130,000.

Let’s round up those numbers for an 80 year old couple, Sal and Sophia. Assume $70,000 in total Social Security, $2,000 of interest from an online savings account, and $24,752 in RMDs from $500,000 in traditional IRAs. That’s a retired couple well above Social Security average benefits and median retirement account balances. 

Does this above-the-median married couple enjoy the benefits of the Hidden Roth IRA while taking RMDs?

You betcha!

How much? 

Of that $24,752 RMD, $24,410 is a Hidden Roth IRA!

This YouTube video demonstrates how Sal and Sophia, with a half million traditional IRA, can have all or almost all of their RMD be tax free. That demonstrates the power of the Hidden Roth IRA. 

I’ve found that it’s possible that a married couple taking RMDs on a $1 million traditional IRA could enjoy the benefit of a Hidden Roth IRA to a small degree in 2026. See this YouTube video for some numbers. 

The Hidden Roth IRA is a real phenomenon for many Americans taking RMDs. Based on the Social Security and retirement account statistics, it is very possible the majority of married couples taking RMDs can benefit from the Hidden Roth IRA.

Singles and Widows Taking RMDs

The benefits of the Hidden Roth IRA are not reserved only for married retirees. Singles and widows can also benefit. This is true even for many single/widowed retirees with above average Social Security income and above median retirement account balances.

On my YouTube channel I discussed an 80 year old single person with a half million traditional IRA and $40,000 of annual Social Security income. She enjoyed the benefit of an $8,660 Hidden Roth IRA. 

Yes, singles and widows tend to enjoy much less when it comes to the Hidden Roth IRA. But even those widows with above average Social Security and above median retirement account balances can enjoy a degree of Hidden Roth IRA benefits.

Inherited Traditional IRAs and the Hidden Roth IRA

One thing people fear is the taxes on inherited IRAs. The 10 year payout rule is viewed as a detriment to leaving heirs traditional IRAs. At first blush, taxing a large traditional IRA within 10 years seems to create a huge tax problem.

But will it really be a problem?

Consider many inheritors of large traditional IRAs. They themselves might already be retired or might decide to retire because of the large inheritance.

I ran through one such scenario on my YouTube channel. It may be the case that even a $2 million inherited traditional IRA could enjoy significant Hidden Roth IRA benefits for some or all of the 10 year payout window.

Implications of the Hidden Roth IRA

The Hidden Roth IRA has several important implications for financial planning. 

All of the below tactics and considerations are offered as educational insights. They are not offered as advice for you or any other individual’s situation. There are times when retirees would wisely want to avoid the below tactics. 

But, if all else is equal, in a general sense the Hidden Roth IRA makes the below tactics more appealing. 

Spend Down Taxable Accounts First

The first is that spending down taxable accounts first in retirement is very attractive, particularly for the early retiree. Part of the reason the Hidden Roth IRA can be so significant is the lack of other income hitting one’s annual tax return. 

Spending down taxable assets first has several advantages, including potentially setting up years of enjoying the Hidden Roth IRA later in retirement. 

Limit Ordinary Income in Retirement

A second implication is it is desirable to limit ordinary income hitting tax returns in retirement. There are various ways to achieve this. For example, holding bonds in traditional retirement accounts takes bond interest income off our tax returns. Consideration should be given to rolling pensions into IRAs to reduce annual ordinary income payouts earlier in retirement. 

Delay Social Security

Delaying claiming Social Security increases future monthly benefits. It also keeps Social Security income off one’s tax returns in their 60s, increasing the runway available to the Hidden Roth IRA.

RMDs are Not Harmful for Many Retirees

Consider Sal and Sophia. They are required to take a $24,752 RMD, almost all of which is tax free. A forced tax free distribution in one’s 70s or 80s is not harmful. Many Americans will enjoy the benefit of the Hidden Roth IRA on a portion of their RMDs. 

Yes, many affluent retirees taking RMDs will not get the benefit of the Hidden Roth IRA. Even for them, RMDs tend not to be all that harmful. 

Why would a couple like Sal and Sophia ever do a Roth conversion if most, if not all, of their RMDs while they are both alive benefit from the Hidden Roth IRA? 

Resource

I’m aware of only one book that discusses the phenomenon of the Hidden Roth IRA. In Tax Planning To and Through Early Retirement, Cody Garrett and I discuss the Hidden Roth IRA in the context of drawdown planning. 

Conclusion

Do you like Roths? If so, one of the best ways to have a Roth is to contribute to a traditional 401(k) at work. In retirement, some of that account may be distributed tax free as a Hidden Roth IRA. 

Many Americans will enjoy the benefit of the Hidden Roth IRA. The Hidden Roth IRA hides inside “taxable” traditional retirement accounts such as IRAs and 401(k)s. 

Planning such as spending taxable accounts first in retirement and reducing ordinary income hitting one’s tax return can increase the benefits of the Hidden Roth IRA.

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn: @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here. 

Roth 401(k) vs Roth IRA

Many ask the question: should I contribute to a Roth 401(k) or contribute to a Roth IRA? Below I discuss why, in the vast majority of cases, I strongly favor Roth IRA contributions over Roth 401(k) contributions. 

Roth Accounts

Who does not love tax free accounts? The Roth, properly distributed, can create tax free income.

The Roth is becoming particularly attractive for the early retiree trying to optimize Premium Tax Credits. Yes, you can potentially fund pre-65 retirement expenses from traditional retirement accounts or sales of taxable account assets. But (with uncommon exceptions) both trigger taxable income, increasing the possibility of going over the 400 percent of federal poverty level cliff. 

Roth IRAs

Roth IRAs are an individual account and can be established at a plethora of financial institutions. Most working taxpayers qualify to make annual contributions to a Roth IRA. However, the ability to make an annual contribution to a Roth IRA phases out at certain income levels and is completely eliminated at $168,000 (single) or $252,000 (married filing joint) of modified adjusted gross income (2026 numbers). 

The maximum annual contribution to a Roth IRA is $7,500 (if under age 50) or $8,600 (if age 50 or older) (2026 numbers). 

Annual contributions can be withdrawn from the Roth IRA at any time for any reason tax and penalty free. Thus, Roth IRAs can perform double duty as both a retirement savings vehicle and as an emergency fund. This is an advantage of Roth IRAs over Roth 401(k)s. 

Of course, considering their tax free growth, it is usually best to keep amounts in a Roth IRA for as long as possible, particularly during one’s working years. 

Roth 401(k)s

Roth 401(k)s are a workplace retirement plan. Contributions can be made through payroll withholding. 

The Roth 401(k) does enjoy some advantages when compared to its Roth IRA cousin. First, there is no income limit to worry about. Regardless of income level, an employee can contribute to a Roth 401(k). Second, the contribution limits are much higher than the contribution limits for Roth IRAs. As of 2026, the annual Roth 401(k) contribution limit is $24,500 (under age 50). Those aged 50 and older by year end qualify for additional catch-up contributions. 

The Roth 401(k) is not a good account for emergency withdrawals. Withdrawals occurring prior to both the account holder turning 59 ½ years old and the account turning 5 years old generally pull out a mixture of previous contributions and taxable earnings.

Roth 401(k) vs Roth IRA

So which one should workers prioritize? Contributions to a Roth 401(k) or contributions to a Roth IRA?

To help us answer that question, let’s consider a young couple pursuing financial independence:

Stephen and Becky are both age 35, married (to each other), and pursuing financial independence. They both would like to retire at least somewhat early by conventional standards. They each have a W-2 salary of $110,000. They have approximately $2,000 of annual interest and dividend income. They claim the standard deduction of $32,200 in 2026. At this level of income, they have a 22 percent marginal federal income tax rate. Stephen and Becky each have access to a traditional 401(k) and a Roth 401(k) at work. They would like to maximize their retirement plan contributions. 

How should Stephen and Becky allocate their retirement plan contributions? Should they contribute to a Roth 401(k) and/or to a Roth IRA?

To my mind, the best play here is to contribute to a Roth IRA ($7,500 each) and contribute to a traditional 401(k) ($24,500 each). Stephen and Becky should not contribute to a Roth 401(k). 

There is a significant tax opportunity cost to making a Roth 401(k) contribution: the ability to deduct a traditional contribution to a 401(k). Remember, the Roth 401(k) shares the $24,500 annual contribution limit with the traditional 401(k). Every dollar contributed to a Roth 401(k) is a dollar that cannot be contributed to a traditional 401(k). 

Contrast the significant tax opportunity cost of making a Roth 401(k) contribution to the tax opportunity cost of making a Roth IRA contribution: practically nothing. 

Stephen and Becky have no ability to deduct a traditional IRA contribution because of their income level and the fact that they are covered by a workplace retirement plan. Thus, they aren’t losing much, from a tax perspective, by each making a $7,500 annual Roth IRA contribution. 

For Stephen and Becky, the idea is to Pay Tax When You Pay Less Tax. As I’ve explored on my YouTube channel, it’s frequently the case that retirees are lightly taxed. The odds are that Stephen and Becky will pay the most tax when they are working. Thus, the better path is likely to be to take the tax deduction (the traditional 401(k) contribution) during their working years and then pay tax on traditional retirement accounts in retirement.  

Trade Off Profile

The trade off profile of the traditional 401(k) versus Roth 401(k) tilts towards the traditional 401(k) contribution.

Every dollar contributed to a Roth 401(k) is a dollar that could not have been tax deducted into a traditional 401(k).

The opposite is true when it comes to IRAs. Every dollar contributed to a Roth IRA is not a dollar that could have been deducted into a traditional IRA in many cases due to the relatively low income limits many face on the ability to deduct a traditional IRA contribution.

If I’m going to do Roth, don’t I want to do the Roth that does not sacrifice a tax deduction? 

Situations Where the Roth 401(k) Contributions Make Sense

Generally there are four situations where choosing to contribute to a Roth 401(k) makes sense. In these situations, the tax rate arbitrage play available to Stephen and Becky isn’t available. 

In the first three situations below, a Roth 401(k) contribution is likely preferable to a traditional 401(k) contribution. As compared to a Roth IRA contribution, (a) the first contributions should generally be to the Roth 401(k) to secure the employer match, and then after that, (b) generally both the Roth 401(k) and the Roth IRA work well. To my mind, the emergency-type fund feature of the Roth IRA is probably the tiebreaker in favor of making the next contributions to a Roth IRA.

Transition Years

Think about a year one graduates college, graduate school, law school, or medical school. Usually, the person works for only the last half or last quarter of the year. Thus, they have an artificially low taxable income (since they only work for a small portion of the year). Why take a tax deduction for a contribution to a traditional 401(k) in such a year, when one’s marginal federal income tax rate might only be 10 percent?

End of career wind downs where one reduces workload, and thus, taxable income, can be a great time to switch to the Roth 401(k) for retirement contributions. 

Transition years are a great time to make Roth 401(k) contributions instead of traditional 401(k) contributions. 

Mini-Retirements

Taking a year-long mini-retirement beginning February 1st? January 401(k) contributions might be best made to the Roth 401(k) instead of the traditional 401(k).

No Hope

Picture a charismatic franchise NFL quarterback. He’s got a $50M plus annual NFL contact, endorsement deals, business ventures, and likely a long TV career after his playing days are done. For him, there is no hope ( 😉 ). He will probably be in the top federal income tax bracket the rest of his life. He might be well advised to “lock-in” today’s low (by historical standards) 37% federal income tax marginal tax rate by choosing to contribute to a Roth 401(k) instead of to a traditional 401(k).

High Earners’ Catch-Up Contributions

This isn’t a question of “traditional versus Roth” preference. It’s a question of the tax law.

Starting in 2026, those making more than $150,000 in prior-year W-2 wages from an employer cannot make catch-up contributions to a traditional 401(k). Their catch-up contributions must be made to the Roth 401(k). 

Sure, this rule takes away a valuable tax deduction. But having Roth money going into retirement is not a bad thing. Those high earners with cash flow sufficient to make Roth catch-up contributions should consider doing so. 

Additional Resource

Cody Garrett and I did a deep dive on all things retirement planning, including Roth retirement accounts, in Tax Planning To and Through Early Retirement, available on Amazon and many other online sources. 

FI Tax Guy can be your financial planner! Find out more by visiting mullaneyfinancial.com

Follow me on LinkedIn: @SeanWMullaney

This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.