Tag Archives: Roth IRA

IRA Basis Isolation Revisited

Basis in IRAs is a funny thing. It necessitates the Pro-Rata Rule, one of the least understood tax rules affecting financial planning. IRA basis creates all sorts of confusion, making traditional IRAs less user friendly.

Further, the value of basis in a traditional IRA is whittled away by inflation. Basis is generally the undistributed prior after-tax (or nondeductible) contributions in the IRA. Since basis might be distributed or converted years, perhaps decades, after the contribution, and is not increased for inflation, its value diminishes the longer it exists.

Thus, basis isolation techniques gain attention. The idea is to use the basis in an advantageous way to (1) harvest it prior to its value being eroded away by inflation and (2) move basis amounts into Roth IRAs relatively tax free.

Basis Isolation Techniques

The most basic basis isolation technique is a properly done Backdoor Roth IRA. IRA basis is created and quickly used to move money into Roth IRAs. The basis is fully used before inflation can erode its value.

The Backdoor Roth IRA is a simple tactic that, employed over many years, can be tremendously beneficial. It has very little downside risk and is relatively simple to implement.

Another basis isolation tactic is the qualified charitable distribution (“QCD”). This one is even easier than the Backdoor Roth IRA. QCDs do not take IRA basis when transferred to a charity. Thus, distributions the taxpayer receives and/or Roth conversions attract more of the available IRA basis to reduce the taxable amount. A small IRA basis benefit, but still helpful.

What about situations where someone has (1) significant basis in an IRA and (2) significant pretax amounts in an IRA? Now we have complexity, risk, and opportunity. The tactic I wrote about which could be useful in this situation is the Basis Isolation Backdoor Roth IRA.

The Basis Isolation Backdoor Roth IRA does the following:

Cleans up IRA basis and uses it before inflation reduces its value.
Creates a Roth IRA the owner can use for tax free withdrawals in retirement.
Reduces future required minimum distributions (“RMDs”) by reducing the size of a traditional IRA.

I believe advisors and IRA owners need to proceed with caution when it comes to the Basis Isolation Backdoor Roth IRA. What initially looks incredibly attractive may turn out to be an unattractive planning technique.

Note that some 401(k) and other qualified plans do not accept roll-ins of IRAs. Some other plans only accept roll-ins of a certain type of IRA, a “conduit IRA.” A conduit IRA is an IRA comprised only of old 401(k)s, 403(b)s, governmental 457s, and other qualified plans and the growth thereon. Thus, plans requiring that the rolled-in IRA be a conduit IRA cannot be used to facilitate isolation of IRA basis created by old nondeductible traditional IRA annual contributions, since the growth on nondeductible traditional IRA contributions is not eligible to be moved over to such plans.

Basis Isolation Backdoor Roth IRA Examples

To analyze whether employing a sophisticated IRA basis isolation technique is advisable, I’m going to present two examples. These examples will illustrate when I favor and when I disfavor using the Basis Isolation Backdoor Roth IRA.

Example 1: Basis Isolation Backdoor Roth IRA into a Large Employer 401(k)

April, age 48 in 2026, works for Apple Inc. She is a participant in their 401(k) plan. In 2022 through 2026 her adjusted gross income was such that she qualified for neither a deductible annual contribution to a traditional IRA nor an annual contribution to a Roth IRA. In 2022 she contributed $6,000 to a traditional IRA. In 2023 she contributed $6,500 to a traditional IRA. In 2024 she contributed $7,000 to a traditional IRA.

All of these contributions were nondeductible. In 2025 April learned about the Backdoor Roth IRA and the Pro-Rata Rule. Thus, she did not make any contributions to a traditional IRA for 2025.

April is planning on retiring in five years. She has a sizable balance in her 401(k). Her taxable brokerage account is worth $100,000, and her traditional IRA is worth $100,000, consisting of (1) the three nondeductible contributions ($19,500 total), (2) a $20,000 401(k) rollover from a former employer plan and (3) investment growth on both 1 and 2. April has no Roth IRAs or health savings accounts.

Only for sake of this analysis, assume Apple’s 401(k) both accepts all IRA roll-ins (other than IRA basis) and offers satisfactory low-cost investment options.

April proceeds as follows:

Step 1: In May 2026, April contacts her IRA custodian and splits her $100,000 traditional IRA into two IRAs. The first is $19,700 invested in a money market account (her basis amount of $19,500 plus a small $200 round up). This IRA is the Leave Behind IRA. The second IRA (IRA 2) is worth $80,300 and can be invested in whatever April desires.

Step 2: April works with the Apple 401(k) plan and her IRA custodian to arrange a direct trustee-to-trustee transfer of IRA 2 from the traditional IRA to April’s Apple 401(k) account.

Step 3: After the completion of Step 2, April converts the entire Leave Behind IRA (now worth $19,900 due to interest accruing on the money market fund) to a Roth IRA. Due to IRA basis isolation, only $400 of the $19,900 is taxable to April on her 2026 federal income tax return.

Steps 1 through 3 are the Basis Isolation Backdoor Roth IRA.

Step 4: April executes the two steps of a 2026 Backdoor Roth IRA, getting another $7,500 (plus a small amount of interest) into her Roth IRA.

Step 5: April ensures that as of December 31, 2026, she has $0 balances in all traditional IRAs, traditional SEP IRAs, and traditional SIMPLE IRAs.

I’m drafting this at the end of the Winter Olympics. Recall that many of the figure skaters make the “heart sign” gesture after their skates. You can feel free to picture me making the heart sign gesture when thinking about April’s Basis Isolation Backdoor Roth IRA.

Why do I like this basis isolation play for April? Let me list the reasons.

Reason One: Helpful to April in early retirement. Recall that April intends to retire at age 53. Recall further that April has just $100,000 in a taxable brokerage account and no Roth IRA or HSA. Steps 1 through 4 create approximately $27,500 in Roth IRA basis that April can access in early retirement prior to age 59 ½ without tax or penalty. Further, the Basis Isolation Backdoor Roth IRA opens up the Backdoor Roth IRA for the last five years of her career, allowing her to create even more Roth IRA basis that can help fund early retirement advantageously from a Premium Tax Credit perspective and an income tax perspective.

Reason Two: Relatively modest IRA transfer. April moves approximately $80,000 of pretax IRA money. Any movement of pretax IRA money involves, however small, an element of risk. While $80,000 is not a tiny sum, it is also not a huge sum. It’s not the lion’s share of April’s wealth. Execution risk is mitigated in April’s case by the modesty of the sum moving into the Apple 401(k).

Reason Three: Using a large employer 401(k). Unless you work at Apple, you, like me, have little insight as to the contours and compliance record of Apple’s 401(k). Regardless, we would be absolutely shocked if we woke up tomorrow morning and read that the IRS and/or the Department of Labor challenged Apple’s 401(k) plan qualification.

Why? Disqualifying Apple’s 401(k) plan would create problems for thousands of voters. Congressmen from multiple Congressional districts, and perhaps even Senators, would strongly question the IRS and/or the Department of Labor about the issue. We know the motivations of the IRS and Department of Labor in this regard. They have every incentive to avoid significant headaches and work with Apple to get to a place where Apple’s 401(k) qualifies as a 401(k).

None of this is to cast aspersions at IRS and/or Department of Labor personnel. It’s simply acknowledging reality. How often do you look to stir up a hornet’s nest at your place of work?

As discussed above, I have absolutely no knowledge or opinion about the qualification of Apple’s 401(k) and/or the quality of the investments in it. I simply raise possibilities and discuss pivotal actors’ motivations to explore planning where one uses a workplace 401(k) to facilitate an IRA basis isolation transaction.

Helping fund early retirement. Relatively low risk of transferring pretax amounts. Parking assets in a stable, established, large employer 401(k) to achieve the objective.

April’s Basis Isolation Backdoor Roth IRA is quite attractive, in my opinion.

Example 2: Basis Isolation Backdoor Roth IRA into a Solo 401(k)

Jack, age 66 in 2026, and his wife, Becky, also age 66 in 2026, retired two years ago. Jack made $80,000 of nondeductible traditional IRA contributions over the years. With rollovers of prior large employer 401(k)s, today Jack’s traditional IRA is worth $2 million. Jack is very happy with the financial institution holding the traditional IRA and the investments offered by that institution.

Jack and Becky currently live off taxable brokerage accounts, currently worth $1 million. Becky also has $500,000 in a traditional IRA with no basis. Neither Jack nor Becky has a Roth IRA or an HSA.

Jack is interested in isolating his $80,000 traditional IRA basis and getting it into a Roth IRA. He’s heard about the Solo 401(k) and is intrigued. He concocts an idea. He will drive for Lyft part time for three months. Doing so brings in $3,000 of revenue. After expenses and a deduction for half of his self-employment taxes, he has $2,000 of net profit.

Jack proceeds as follows:

Step 1: Jack takes the position that he has self-employment income in 2026 and thus opens a Solo 401(k). He makes a maximum $2,000 employee deferral contribution for 2026.

Step 2: In August 2026, Jack contacts his IRA custodian and splits his $2 million traditional IRA into two IRAs. The first is $80,200 invested in a money market account (his basis amount of $80,000 plus a small $200 round up). This IRA is the Leave Behind IRA. The second IRA (IRA 2) is worth $1,920,000 and can be invested in whatever Jack desires.

Step 3: Jack works with the Solo 401(k) plan custodian and his IRA custodian to arrange a direct trustee-to-trustee transfer of IRA 2 from the traditional IRA to Jack’s Solo 401(k) account.

Step 4: After the completion of Step 3, Jack converts the entire Leave Behind IRA (now worth $80,500 due to interest accruing on the money market fund) to a Roth IRA. Due to IRA basis isolation, Jack takes the position that only $500 of the $80,500 is taxable to him on his 2026 federal income tax return.

Steps 2 through 4 are the Basis Isolation Backdoor Roth IRA.

Step 5: Jack ensures that as of December 31, 2026, he has $0 balances in all traditional IRAs, traditional SEP IRAs, and traditional SIMPLE IRAs.

Jack’s Basis Isolation Backdoor Roth IRA makes me feel the way my New York Jets fandom has in recent years. For those unaware, the Jets currently have the longest streak of missing the playoffs in North American major sports.

Why do I disfavor this basis isolation play for Jack? Let me list the reasons.

Reason One: No help solving retirement funding issues. Jack and Becky’s retirement is well funded. Unlike April, they do not need to control income for Premium Tax Credit purposes. Jack and Becky are currently living off taxable accounts. As I have previously discussed, they may pay practically no federal income tax doing so.

Why are Jack and Becky moving a large account and doing sophisticated distribution planning when they already have years of paying hardly any federal income tax?

Reason Two: Large IRA transfer. Jack moves approximately $1.92M of pretax IRA money. Any movement of pretax IRA money involves, however small, an element of risk. $1.92 million is the lion’s share of Jack and Becky’s financial wealth. Execution risk on a $1.92 million transfer of assets already in a satisfactory location, a traditional IRA with a liked institution, is not something I favor successful retirees affirmatively planning into.

Reason Three: Using a Solo 401(k). Compare the IRS disqualifying Jack’s Solo 401(k) with disqualifying Apple’s Solo 401(k). No Congressman is reaching out to the IRS if they disqualify Jack’s Solo 401(k). Further, the success of Jack’s strategy depends on him successfully maintaining his Solo 401(k) in the future. Rocket science? No. But guaranteed? Also, no.

Is Jack’s Solo 401(k) Valid?

Contributions of Self-Employment Income

I strongly question whether Jack would have a valid Solo 401(k) in this fact pattern. Consider the Congressional intent behind Solo 401(k)s. Solo 401(k)s allow the self-employed to make significant contributions of self-employment income to retirement accounts. Solo 401(k)s solve for the problem of the self-employed not having access to large employer 401(k) plans.

Jack’s use of a Solo 401(k) is hardly reflective of the intent behind the Solo 401(k). Jack accumulated years of retirement account contributions in a traditional IRA. He had no need for the Solo 401(k) to accumulate and maintain retirement savings. Further, about a tenth of a percent of the Solo 401(k) balance is funded by “self-employment income.” About 99.9 percent of the balance of Jack’s Solo 401(k) has nothing to do with self-employment.

These numbers indicate that Jack’s Solo 401(k) has little to do with contributions of self-employment income to save for retirement.

Is Jack Self-Employed?

As I discussed on page 24 of this article, one needs self-employment to have a Solo 401(k). I strongly question whether Jack’s Lyft driving qualifies as self-employment allowing him to open a Solo 401(k).

Consider making the case to respect Jack’s Lyft activities as “self-employment.” How is a retired person self-employed? What do Jack and Becky live off of? Accumulated retirement assets or Lyft income? That Jack and Becky live off their retirement savings and not off Jack’s Lyft income is instructive in determining whether that income comes from an activity sufficient to be considered a business to allow Jack to have a Solo 401(k).

IRA Basis Isolation and Solo 401(k) Stuffing

I’m not shy when I see the IRS in a weak position. In this article, I strongly argue the IRS has a very weak position if they attempt to enforce the literal terms of Notice 2022-6 governing 72(t) payment plans.

I’m also not shy in acknowledging situations where the IRS may have a strong position. When it comes to stuffing Solo 401(k)s for distribution motivated reasons, I believe the IRS has a strong position. I previously wrote about this when it comes to stuffing a Solo 401(k) for Rule of 55 planning. See pages 24 through 26 of this article.

I believe the IRS would have a high likelihood of success were they to challenge the validity of Jack’s Solo 401(k). Can you imagine taxing a $2 million traditional IRA through an attempted rollover into an invalid Solo 401(k) just to get $80,000 into a Roth IRA?

After considering Solo 401(k) stuffing in the contexts of both the Rule of 55 and the Basis Isolation Backdoor Roth IRA, I’ve come up with Mullaney’s Solo 401(k) Distribution Planning Principle:

Do not use a Solo 401(k) for distribution planning.

Solo 401(k)s can be distributed out of (as I argue in this article), but I disfavor using them to facilitate sophisticated distribution planning such as a Basis Isolation Backdoor Roth IRA.

Fortunately, Solo 401(k)s remain a great option for accumulation planning for the fully self-employed.

Tax Planning and New Businesses

I disfavor tax planning that necessitates the starting of a business to achieve retirement tax benefits.

Picture a financial planner, Jill, recommending to Jane, a self-employed lawyer, that she opens a Solo 401(k). Jill’s recommendation does not necessitate Jane starting a business. Jill simply is recommending a potentially advantageous tactic that Jane’s preexisting business opens the door to.

Contrast Jane’s preexisting business with Jack’s new “business” of Lyft driving. There are legitimate Lyft businesses operated by thousands of Americans. But in Jack’s case, his Lyft activity does not strike me as likely to be considered a trade or business sufficient to open a Solo 401(k).

Even if the Lyft activity is a sufficient trade or business, why do tax planning that requires changes in lived experience when the retiree is already financially successful?

Basis Isolation Backdoor Roth IRA Planning

Factors I view as favorable indicators that the Basis Isolation Backdoor Roth IRA may be a good planning tactic:

Need for Roth basis in early retirement
Relatively modest pretax amounts in traditional IRAs
Possibility of opening up several years worth of Backdoor Roth IRAs
Rolling pretax amounts into a large employer 401(k) with good investment selections

Factors I view as indicative that the Basis Isolation Backdoor Roth IRA should be disfavored:

No compelling need for Roth basis in early retirement
Significant pretax amounts in traditional IRAs
No ability to do future Backdoor Roth IRAs
Rolling pretax amounts into a Solo 401(k)
The necessity to start a business to achieve a tax benefit in retirement
Confusion surrounding the actual amount of IRA basis, since IRA basis cannot be rolled into a 401(k) or other workplace retirement plan

The above are my opinions. None of this should be read as advice for you or anyone else. Further, none of this should be read as to say any previously implemented planning in this regard is “wrong.” Rather, all this is intended to provide is my views as to what is desirable and what is not desirable from a planning perspective.

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.

The Spousal IRA

Is earned income required to contribute to an individual retirement account (an “IRA”)? If you’re married, it may not be, thanks to the Spousal IRA.

The Spousal IRA is a great opportunity for families to build financial stability, and perhaps get a juicy tax deduction, even if only one of the spouses work outside of the home. It can help families save for the future, qualify for Premium Tax Credits, and prioritize important goals such as raising children.

IRA Basics

There are two types of IRAs that most working Americans can consider. I did a primer about them here.

A traditional IRA offers tax-deferred growth and the possibility of a tax deduction for contributions. While distributions from a traditional IRA in retirement are taxable, many will find that traditional IRA distributions in retirement are only lightly taxed.

A Roth IRA offers no tax deduction on the way in, but features tax-free growth and tax-free withdrawals in retirement.

Both can be a great way to build up tax-advantaged wealth for retirement.

IRA Contribution Limits

The limit on IRA contributions for 2025 is the lesser of $7,000 or earned income ($8,000 or earned income if you are age 50 or older in 2025). The limit on IRA contributions for 2026 is the lesser of $7,500 or earned income ($8,600 or earned income if you are age 50 or older in 2026). Remember that traditional IRAs and Roth IRAs share that contribution limit, so a dollar contributed to a traditional IRA is a dollar that cannot be contributed to a Roth IRA and vice-versa.

IRA Contribution Deadlines

Generally speaking, the deadline to contribute to either a traditional IRA or a Roth IRA is April 15th of the following year. The deadline cannot be extended even if the taxpayer files for an extension to file their own tax return. On rare occasions the IRS may provide a very limited exception to the April 15th IRA contribution deadline.

The Spousal IRA

For purposes of having earned income allowing one to make an IRA contribution (tradition and/or Roth), a non-working spouse can use their spouse’s earned income for purposes of making either (or both) a traditional IRA or a Roth IRA contribution.

Here is an example:

Joe and Mary are married. Joe has a W-2 job and Mary does not. Mary can make an IRA contribution (a Spousal IRA) based on Joe’s W-2 earned income.

The Spousal IRA can be used to increase tax-advantaged retirement savings. It can also be used to strategically optimize tax deductions. Many W-2 workers are covered by a workplace 401(k) plan. Thus, based on low income limits, it is difficult for them to deduct a traditional IRA contribution.

However, when one is not covered by a workplace retirement plan, it is much easier to qualify to deduct a traditional IRA contribution. It is often the case that a Spousal IRA will offer a potential tax deduction when the working spouse is not able to deduct a traditional IRA contribution.

IRA Contributions to Increase Premium Tax Credits

For early retirees, planning for the Premium Tax Credit in order to save thousands of dollars on ACA medical insurance premiums can be a challenge. This is particularly true in 2026 with the return of the 400 percent of federal poverty level cliff. A dollar of income over the 400 percent of federal poverty level cliff could cause a married couple $10,000 of Premium Tax Credits.

One tool in the tool box of those with side hustles or part time jobs in early retirement is the deductible traditional IRA contribution. An example can illustrate how a married couple could use deductible traditional IRA contributions, including a deductible spousal IRA contribution, to qualify for thousands of dollars of Premium Tax Credits.

Larry and Cheryl, both age 55, are retired in 2026. They have capital gains, interest, and dividends in 2026 of $80,000. Cheryl works part time and earns $20,000 in W-2 income. She is not covered by a workplace retirement plan.

Larry and Cheryl’s $100,000 of adjusted gross income puts them above 400% of the 2025 federal poverty level ($84,600). However, they can each make a deductible $8,600 traditional IRA contribution. Larry’s deductible traditional IRA contribution is a Spousal IRA.

Those deductible contributions lower Larry and Cheryl’s adjusted gross income to $82,800, allowing them to qualify for thousands of dollars of Premium Tax Credits for 2026.

Split-Year Spousal IRA Contribution Example

As I write this, the 2026 tax return season (for 2025 tax returns) is about to get started. Now’s the time to be thinking about 2025 IRA contributions if you have not yet made one!

There’s still plenty of time to contribute to an IRA (traditional or Roth) for the year 2025. Some of that planning might involve strategically employing a Spousal IRA. Here’s an example:

Mark and Theresa, both age 41, are married and have three children. They live in California. Mark works a W-2 job and Theresa does not have earned income. Mark is covered by a 401(k) at work. Their modified adjusted gross income (“MAGI”) for 2025 is $200,000. This puts them in the 22% marginal federal income tax bracket and the 9.3% marginal California income tax bracket. They have made no IRA contributions for either of them for 2025 going into tax season.

It is early April 2026 and Mark and Theresa are about to file their tax returns. They see they have $9,000 in cash available to use to make 2025 IRA contributions. What they might want to do is contribute $7,000 to a 2025 deductible traditional IRA for Theresa (a Spousal IRA) and the remaining $2,000 to a 2025 Roth IRA for Mark, since he cannot deduct a traditional IRA contribution. By prioritizing a tax deduction, Mark and Theresa save $2,191 on their 2025 income taxes.

The Spousal IRA as a Backdoor Roth IRA

The Spousal IRA can be executed as a Backdoor Roth IRA. Here is an example:

Jack and Betty, both age 42, are married. Jack works a W-2 job and Betty does not have earned income. Jack is covered by a 401(k) at work. Their MAGI for 2026 is $265,000 and thus neither of them qualify to make a regular annual contribution to a Roth IRA.

Assuming Betty has no balances in traditional IRAs, SEP IRAs, and SIMPLE IRAs (and thus does not have a Pro-Rata Rule problem), Betty can contribute $7,500 to a nondeductible traditional IRA and then convert that amount (plus any growth) to a Roth IRA. Doing so uses a Spousal IRA to implement a Backdoor Roth IRA.

Spousal IRA Tax Return Reporting

To report a deductible traditional Spousal IRA contribution, the amount of the contribution must be reported on Schedule 1, line 20, filed with the couple’s annual federal income tax return.

To report a nondeductible traditional Spousal IRA contribution, the amount of the contribution must be reported on Part I of the Form 8606.

There is no required federal income tax return reporting for a Roth Spousal IRA contribution. However, such contributions should be entered into the tax return software to help determine the potential eligibility for a retirement savers’ credit.

Conclusion

The Spousal IRA creates a great opportunity for married couples to save for retirement and possibly gain access to valuable tax deductions. It can help married couples focus on important priorities such as child rearing and still make significant contributions to retirement accounts. For the early retired with small amounts of earned income, it can help reduce income in order to qualify for a Premium Tax Credit or increase the amount of a Premium Tax Credit.

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, 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.

The Widow’s Tax Trap and RMDs

People worry about taxation in retirement. In particular, they worry about the taxation of required minimum distributions (RMDs), especially after the death of a spouse. Widows find themselves in the single tax brackets after decades of enjoying the more favorable married filing jointly tax brackets.

Widows and widowers finding themselves as single taxpayers is often referred to as the Widow’s Tax Trap.

RMDs require taxable withdrawals from traditional retirement accounts such as IRAs and 401(k)s. But just how bad are they when a widow or widower is in the Widow’s Tax Trap?

Let’s unpack just how bad the combination of the Widow’s Tax Trap and RMDs is for an 81 year-old widow with a very tax inefficient structure: almost $3.7 million of her approximately $4.5 million of financial wealth in a traditional IRA.

My experience tells me many financial planners and gurus will tell you this is a terrible outcome. That $3.7 million traditional IRA is infested with taxes!

But is it really?

81 Year-Old Widow in the Widow’s Tax Trap

I put together an analysis of an affluent widow in the Widow’s Tax Trap. Let’s call her Jane. Her traditional IRA causes her to have an RMD of almost $190,000. Wow!

Grab the tax analysis file here!

To be fair, most Americans will never have a $3.7 million traditional IRA and/or a $190K RMD. But I analyze them to demonstrate “what if the widow is highly inefficient from a tax perspective?”

What are the federal income tax rates on that feared RMD?

Isn’t it remarkable that an 81 year-old widow with almost $3.7 million in a traditional IRA has more of her RMD taxed in the 12 percent tax bracket than in the 32 percent tax bracket?

Despite all the fear of taxation of RMDs, that’s the reality when it comes to a very affluent, very inefficient 81 year-old widow.

Some might say “but what about IRMAA?” “What about the net investment income tax?”

Yes, Jane pays IRMAA of approximately $6,500 in two years because of her RMDs. And yes, the RMDs trigger approximately $500 of net investment income tax.

But do either of these have any impact on Jane’s lived experience and financial success?

Absolutely not!

The government scores some Garbage Time Touchdowns on Jane by collecting some IRMAA, some net investment income tax, and some income tax in the 32 percent bracket.

A Garbage Time Touchdown is a late in the game touchdown scored by a team that will lose the game regardless of the touchdown. As a New York Jets fan, sadly I’m an expert in Garbage Time Touchdowns.

Jane has some tax inefficiencies that are just Garbage Time Touchdowns.

Think about the lifetime arc of Jane’s taxes in today’s tax planning world:

As a single individual, Jane likely deducted workplace retirement plan contributions at a 22, 24, or 32 percent rate. Win versus the IRS!
As a married couple, Jane and her husband likely deduct into workplace retirement plans at a 22 or 24 percent rate. Win versus the IRS!
In early retirement, they live off taxable accounts and do not do Roth conversions. They may pay nothing in federal income tax! Win versus the IRS!
Once taxable accounts are depleted, traditional retirement account distributions could have benefitted from the Hidden Roth IRA. Win versus the IRS!
Even RMDs are likely subject to the 12 percent and 22 percent brackets while they are both alive. Win versus the IRS!
As a widow, the relatively minor tax inefficiencies creep in. These are Garbage Time Touchdowns.

This arc, which eschewed Roth 401(k) contributions and taxable Roth conversions, screams “Jane wins a blow out victory over the IRS” over the course of her lifetime.

Sure, at the end Jane gave up some Garbage Time Touchdowns to the IRS, but not after decades of defeating the IRS.

What’s more important than winning the spreadsheet is lived experience. Notice that Jane paying 32 percent on about six percent of her RMD has $200K of after-tax cash flow?

In order for the Widow’s Tax Trap to bite hard, the widow generally has to have about $200K or more of after-tax cash flow.

The taxes bite when widows can most afford them!

Watch me break down the tax analysis of our 81 year-old widow on YouTube.

Roth Conversions to Avoid the Widow’s Tax Trap

Should Jane and her husband have done taxable Roth Conversions in retirement to avoid the widow paying 32 percent federal income tax on some of her RMDs?

Here vocabulary becomes very important. Yes, some taxable Roth conversions taxed at 22 percent or 24 percent could have been beneficial. But they were hardly necessary.

Outside of cases where taxable Roth conversions create enough required income to qualify for a Premium Tax Credit, taxable Roth conversions are not necessary.

Yes, there are times where large taxable Roth conversions can be beneficial in that they mitigate harmful effects of the Widow’s Tax Trap. But the analysis above shows that the harmful effects of the Widow’s Tax Trap aren’t all that harmful for the vast, vast, vast majority of Americans. This is true even those with most of their financial wealth in traditional retirement accounts.

Why would Jane and her husband prioritize large scale taxable Roth conversions to avoid having six percent of her RMDs as a widow being subject to the 32 percent tax bracket?

2026 Backdoor Roth IRA Timing

Merry Christmas and Happy New Year!

The Christmas season (ending January 11th this year) coincides with the beginning of personal finance’s Backdoor Roth IRA season.

Many readers look forward to New Year’s Day not to watch the Rose Bowl but rather to contribute to a traditional IRA, the first step of the Backdoor Roth IRA.

The question then becomes: how long should I wait to do the second step of the Backdoor Roth IRA, the conversion of the traditional IRA contribution and any small growth to a Roth IRA?

Below I discuss my views on the matter as they apply to 2026 Backdoor Roth IRAs.

Backdoor Roth IRA Timing Concerns

The Backdoor Roth IRA involves three accounts and two steps. First, the investor transfers money from a bank account (A) to a traditional IRA (B) as a regular annual contribution to the traditional IRA. Second, the investor converts the entire traditional IRA balance to a Roth IRA (C).

Written out logically, the Backdoor Roth IRA sequence is as follows:

A→B→C

The question is “do we respect the transfer to B or do we disregard the transfer to B and say, instead, that there was a single transfer from A to C?

Michael Kitces, in 2015, wrote an article stating that he was, at that time, concerned that, if the Roth conversion step was done close in time to the traditional IRA contribution, the transfer to the traditional IRA would be disregarded. For high income individuals, this would create an excess contribution to a Roth IRA subject to a 6% annual penalty.

I do not share his concern. My perception is that most financial planners, financial advisors, and tax return preparers also do not share his concern.

My Approach

I wrote a detailed blog post stating that I do not believe the step transaction doctrine invalidates the Backdoor Roth IRA. Of particular note is Section 408(d)(2)(B), which provides that all IRA distributions (including Roth conversions) during the year are aggregated into a single distribution.

This rule tells us that timing within the year is irrelevant for determining tax treatment. Why would a judicial doctrine change the Backdoor Roth IRA’s tax treatment based on a timing concern when the Code itself says timing is irrelevant?

Favored Backdoor Roth IRA Timing

Here is my favored approach: Make the traditional IRA contribution at any time during a particular month and then wait until the following calendar month to do the Roth conversion step. Usually the traditional IRA is invested in a low yielding stable cash or cash equivalent type of asset, creating a small bit of income in between the two steps.

Here is how that plays out with an example:

Keith, age 47, wakes up on New Year’s Day 2026 and contributes $7,500 to a traditional IRA invested in a money market fund. On February 2, 2026, when the traditional IRA has grown to $7,525, he converts all of it to a Roth IRA.

Yes, Keith could have converted the $7,500 to a traditional IRA on January 2, 2026. I would strongly argue that he has a good Backdoor Roth IRA in that scenario.

But my favored approach is for him to wait until February. Why not? What’s the downside to my favored approach? Practically none. My favored approach increases Keith’s taxable income by $25, which is obviously no big deal. It also buys Keith a bit more protection against the step transaction doctrine concern (which, admittedly, I believe to be a minimal concern).

Backdoor Roth IRA Diligence

Allow me to touch on two important diligence points when doing the Backdoor Roth IRA.

The first is to ensure that as of December 31st of the year of any Roth conversion step (so 2026 in Keith’s example), it is important to have $0 (or close to $0) in all traditional IRAs, SEP IRAs, and SIMPLE IRAs. For more discussion as to why that’s important, see this post.

Second, it is important to properly complete the Form 8606 and file it with the annual federal income tax return. This post has an example of how a Form 8606 is completed to reflect a Backdoor Roth IRA.

The Backdoor Roth IRA After an Excess Contribution to a Roth IRA

It happens all the time. People contribute to a Roth IRA only to find out at tax time they made too much income to have made the Roth IRA contribution.

There are two primary ways to correct this situation. They are a recharacterization and a corrective distribution. Both are entirely valid remedial paths when it turns out that one contributed to a Roth IRA and their income was too high to have done so.

But which remedial path makes the most sense if the investor wants to also do a Backdoor Roth IRA for the year in question?

As I am posting this in late 2025, this is about to become very relevant as applied to excess Roth IRA contributions occurring in 2025. Many will find out in early 2026 as they work through their 2025 tax return that they did not qualify for a previously made 2025 Roth IRA contribution.

Below I explore this topic with two examples.

Recharacterization

Let’s consider Rich and Rebecca, married and both age 48 in 2025. At least one of them was covered by a workplace retirement plan in 2025. Rich and Rebecca each contributed $7,000 to a Roth IRA on January 2, 2025 anticipating their 2025 modified adjusted gross income would be approximately $225,000. Due to a year-end bonus and unexpected capital gains distributions, their 2025 MAGI turned out to be $250,000, which they discovered after talking to their income tax return preparer in February 2026.

Having exceeded the 2025 Roth IRA MAGI contribution limit of $246,000, they need to remedy the situation. Since neither of them has any balance in a traditional IRA, SEP IRA, and/or SIMPLE IRA, they are also interested in doing a Backdoor Roth IRA for 2025 (what I refer to as a Split-Year Backdoor Roth IRA).

They proceed as follows. First, they ask their financial institution to recharacterize their 2025 Roth IRA contributions and related earnings ($550 in Rich’s case, $600 in Rebecca’s case) as traditional IRAs in late February 2026. This event does not create any 2025 or 2026 taxable income.

Second, in early March 2026, Rich converts the balance in his traditional IRA, now $7,560, from his traditional IRA to a Roth IRA. Likewise, Rebecca converts the balance in her traditional IRA, now $7,612 from her traditional IRA to a Roth IRA. This creates $560 of 2026 taxable income for Rich and $612 of 2026 taxable income for Rebecca.

Both Rich and Rebecca have $0 balances in all traditional IRAs, SEP IRAs, and SIMPLE IRAs as of December 31, 2026.

I believe that it’s helpful to illustrate the sequence logically using letters. A is a checking account, B is a traditional IRA, and C is a Roth IRA.

Here is how the entire sequence looks when Rich and Rebecca first contribute to a Roth IRA, correct it through a recharacterization, and then do the Split-Year Backdoor Roth IRA.

A→C→B→C

Corrective Distribution

Let’s consider Carl and Debbie, married and both age 47 in 2025. At least one of them was covered by a workplace retirement plan in 2025. Carl and Debbie each contributed $7,000 to a Roth IRA on January 2, 2025 anticipating their 2025 modified adjusted gross income would be approximately $225,000. Due to a year-end bonus and unexpected capital gains distributions, their 2025 MAGI turned out to be $255,000, which they discovered after talking to their income tax return preparer in February 2026.

They proceed as follows. First, they ask their financial institution to send them a corrective distribution of their 2025 Roth IRA contributions and related earnings ($650 in Carl’s case, $700 in Debbie’s case) in late February 2026.

The February 2026 corrective distribution of the excess Roth IRA contributions and related net income attributable to the returned contributions creates taxable income of $650 to Carl and $700 to Debbie in 2025 to be reported on their soon-to-be-filed 2025 federal income tax returns. See Section 408(d)(4)(C), Treas. Reg. Sec. 1.408A-6 Q&A 1(d), and this Vorris J. Blankenship article.

Second, in late February 2026, both Carl and Debbie make a $7,000 contribution to their traditional IRAs and code the contribution as being for 2025.

Third, Carl converts the balance in his traditional IRA, now $7,010, from his traditional IRA to a Roth IRA. Likewise, Debbie converts the balance in her traditional IRA, now $7,010, from her traditional IRA to a Roth IRA. This creates $10 of 2026 taxable income for Carl and $10 of 2026 taxable income for Debbie.

Both Carl and Debbie have $0 balances in all traditional IRAs, SEP IRAs, and SIMPLE IRAs as of December 31, 2026.

Here is how the entire sequence looks when Carl and Debbie first contribute to a Roth IRA, correct it through a corrective distribution, and then do the Split-Year Backdoor Roth IRA.

A→C→A→B→C

Critical Assessment

Let’s step back. Logically, what is the Backdoor Roth IRA? It boils down to the following formulation:

A→B→C

I and others have argued that “B” should be respected. I’m unaware that the IRS disagrees with this view. At this point, after a decade and a half of Backdoor Roth IRAs, it would be exceedingly odd for the IRS to start aggressively challenging the transaction.

Assessing the Corrective Distribution Remedial Path

Viewed logically, the “corrective distribution followed by the Split-Year Backdoor Roth IRA” is just as strong as the Backdoor Roth IRA itself. It simply appends two additional transactions, an (ultimately excess) Roth IRA annual contribution followed by a corrective distribution. If one can defend the Backdoor Roth IRA, one should be able to defend the corrective distribution followed by the Split-Year Backdoor Roth IRA.

You might argue that the money was in a Roth IRA and ultimately ends up back in a Roth IRA. That can be true, though the investor need not use the exact same dollars received in the corrective distribution to initiate the later Split-Year Backdoor Roth IRA.

Regardless, in order to “collapse” steps, the IRS would need to successfully defeat not one, but two, steps. First the IRS would need to successfully disregard the corrective distribution on which the investor most likely reports taxable income. Second, the IRS would need to disregard the transfer to the traditional IRA.

The IRS has not aggressively tried to disregard a single step (the traditional IRA contribution) when it comes to the Backdoor Roth IRA transaction for the past 15 years. It’s difficult to imagine the IRS would try to aggressively disregard two distinct steps, which is what it would take to defeat the “corrective distribution followed by the Split-Year Backdoor Roth IRA” path.

Assessing the Recharacterization Remedial Path

Where I get much more concerned is the “recharacterization followed by the Backdoor Roth IRA” path.

In all of these analyses, the key issue is “do we respect “B”?” Recall the recharacterization followed by the Backdoor Roth IRA formulation:

A→C→B→C

Notice what’s on both sides of B?

We have a case where funds are in a Roth IRA, temporarily rest in a traditional IRA, and then end up right back in a Roth IRA.

Yes, the Internal Revenue Code allows recharacterizations. But could the IRS successfully disregard a recharacterization into a traditional IRA when both immediately before and immediately after those funds are in a Roth IRA?

I believe that a recharacterization followed by a Split-Year Backdoor Roth IRA dramatically increases the risk to the investor. The risk is that the recharacterization would be disregarded, exposing the investor to the annual 6% excess Roth IRA contribution penalty.

Favored Approach

I strongly favor the corrective distribution remedial path if one is looking to do a Backdoor Roth IRA after having made an excess contribution to the Roth IRA for the year.

What are the drawbacks to my favored approach? It requires three steps instead of two, since the investor must initiate the corrective distribution, contribute to a traditional IRA, and then convert the traditional IRA.

Further, my favored approach generally accelerates the tax on the “net income attributable” to the excess contribution. Recall Rich and Rebecca pay that tax in 2026 while Carl and Debbie pay practically all of that tax with their 2025 federal income tax returns.

My favored approach generally does not increase the small tax created by the combination of the remediation and the Split-Year Backdoor Roth IRA. It simply accelerates it by one year. In a low yield world, that is a tiny drawback.

I believe that the corrective distribution remedial path is very strong. I do not believe that the IRS would stand a very good chance of disregarding two steps to create an excess contribution to a Roth IRA. Further, I believe that respecting time spent in a traditional IRA is much more challenging when that money is in a Roth IRA immediately before and immediately after being in the traditional IRA.

When both corrective distributions and recharacterizations are available to those looking to ultimately do a Backdoor Roth IRA, why not choose the corrective distribution path?

Finally, note that this blog post is not advice for you or anyone else. I am not writing that the recharacterization remedial path cannot work. Rather, I am, in an academic sense, simply stating two things.

First, the recharacterization followed by a Split-Year Backdoor Roth IRA path increases the risk to the investor.

Second, the corrective distribution path appears to be preferable to the recharacterization path if one is looking to do the Split-Year Backdoor Roth IRA after an excess contribution to the Roth IRA for the same year.

The Real Answer

Congratulations on reading a blog post that should not exist! The real answer to this issue isn’t my analysis. Rather, it is for Congress to eliminate the MAGI restriction on the ability to make an annual Roth IRA contribution. This would align American rules with Canadian rules.

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

Follow me on LinkedIn at @SeanWMullaney

2026 ACA Premium Tax Credits: Embrace Solutions!

Fear is prevalent.

ACA Premium Tax Credits are going away!!!

The 400 percent cliff will ruin your early retirement!!!

Neither of these is true. But the messages are out there.

Yes, the Premium Tax Credit for 2026 is very unsettled. Could it create problems for early retirees in 2026? Yes.

But now is the time to embrace solutions, to borrow a phrase from Jon Taffer.

Since 2026 ACA open enrollment begins in less than a week, below I assess the lay of the land for ACA medical insurance and Premium Tax Credits in 2026. I then move onto planning as early retirees consider their ACA medical insurance options for 2026 in late 2025.

Premium Tax Credit

From 2014 through 2020, the Premium Tax Credit reduces ACA medical insurance premiums based on this table. Of note is that this table fully eliminates Premium Tax Credits once one’s income is over 400 percent of the federal poverty level. I refer to the years 2014 through 2020 as the “First Era.”

From 2021 through 2025, the Premium Tax Credit reduces ACA medical insurance premiums based on this more generous table. Of note is that this table ratably reduces, but does not eliminate, Premium Tax Credits once one’s income is over 400 percent of the federal poverty level. I refer to the years 2021 through 2025 as the “Second Era.”

With no change to the laws, in 2026 we start what I refer to as the “Third Era.” The Premium Tax Credit will be determined based on the First Era table. The enhancements to ACA Premium Tax Credits will go away. ACA Premium Tax Credits themselves will not go away.

Fears Over Changes to the Premium Tax Credit

If we look at history, we know that the 400 percent of federal poverty level cliff will not ruin an early retirement.

Why?

We saw from 2014 through 2020 plenty of Americans were successfully early retired. Many of them got Premium Tax Credits.

Yes, the First Era featured the 400 percent of federal poverty level cliff. Yes, that was a financial planning issue for early retirees to deal with. No, it did not ruin their early retirement.

Further, medical insurance premiums are simply one of many financial planning issues early retirees deal with. It’s odd to claim that a change to one expense in 2026 will destroy a retirement plan.

The Government Shutdown

Currently, many federal government agencies are either closed or working with reduced operations. This is commonly referred to as the “Government Shutdown.”

The Government Shutdown provides a potential leverage point for politicians to extend a version of the enhanced Premium Tax Credits. Democrats generally want to make the Second Era Premium Tax Credit enhancements permanent. Interestingly enough, there are two Republican cohorts that also want to extend some version of enhanced Premium Tax Credits. One is a baker’s dozen of generally Blue State Republicans in the House and one are more populist Republicans led by Representative Marjorie Taylor Greene.

There are no guarantees. It is absolutely possible that some version of enhanced Premium Tax Credits will apply in 2026. However, from a planning perspective, early retirees should consider the very real possibility that we go back to the First Era Premium Tax Credit rules in 2026.

2026 Premium Tax Credit Solutions

One year’s medical insurance premiums are not likely to ruin anyone’s early retirement and finances.

That being said, early retirees should approach the situation by embracing solutions.

To my mind, for those looking to improve their tax and ACA medical insurance premium picture in 2026, as of late October 2025 there are two primary paths. The first path is “Bronze Plan and Lower Income” and the second path is “Catastrophic Plan and Lower Premiums.”

Bronze Plan and Lower Income

I have previously said that in the new planning environment, Bronze is Gold.

For many early retirees, Bronze ACA plans will be very desirable in 2026. Why? First, the premiums are lower than Platinum, Gold, and Silver plans, reducing pressure on the Premium Tax Credit issue.

Second, beginning in 2026 all Bronze plans will qualify as “high deductible health plans” allowing deductible HSA contributions. This allows early retired enrollees to deduct their HSA contributions, possibly increasing their Premium Tax Credit and possibly ducking under the 400 percent of federal poverty level cliff.

Third, this sets up a tax free pot of money from which to pay medical expenses in 2026. From a Premium Tax Credit perspective, it’s better to reach into a tax free pot than to fund medical expenses by selling a capital gain asset or taking a taxable distribution from a traditional IRA.

A component of Bronze is Gold planning is keeping taxable income low. One helpful tactic in this regard is to hold all taxable bonds in traditional retirement accounts. This keeps interest income off one’s tax return, reducing Premium Tax Credit damage that taxable bond interest can do.

Cody Garrett and I anticipated that keeping income low for Premium Tax Credit purposes would be a big issue in 2026 when we wrote Tax Planning To and Through Early Retirement. That’s why, on pages 176 and 177 of the paperback version, we include 8 tactics early retirees might be able to use to lower their income in 2026 and increase their Premium Tax Credit.

Catastrophic Plan and Lower Premiums

A little-noticed change in September 2025 can be very helpful to those thinking about enrolling in ACA medical insurance in November 2025 for 2026.

The government now allows those with incomes above 400 percent of the federal poverty level to enroll in an ACA Catastrophic medical insurance plan. Previously, catastrophic plans were mostly open only to those under age 30 or could otherwise demonstrate a hardship. Now the rules allow having income over 400 percent of federal poverty level to qualify as having a hardship, and thus enroll in Catastrophic coverage.

I believe that Catastrophic coverage is an option well worth considering for many early retirees. Catastrophic policies generally have no coinsurance to start, but they do have in-network annual out-of-pocket maximums. To my mind, that latter feature is, by far, the most important benefit of a medical insurance policy–avoidance of financial ruin in the event of significant medical expenses.

Further, Catastrophic plans generally have lower premiums than Bronze plans, perhaps significantly lower. Note this can vary significantly based on age and geography.

Those on a Catastrophic plan do not qualify for a Premium Tax Credit. That can be a feature rather than a bug if you’re likely to be near the 400 percent of federal poverty level cliff anyways. Being on a Catastrophic plan makes Roth conversions much more desirable. With no Premium Tax Credit to manage for, the early part of an early retirement becomes a much more desirable time to do Roth conversions.

In today’s planning environment, I’m generally conservative when it comes to Roth conversions when one is on an ACA medical insurance plan. Why do Roth conversions when you are subject to what are essentially two federal income taxes; the federal income tax itself and the possible reduction or elimination of the Premium Tax Credit?

Catastrophic plan enrollment can open the door to more potentially beneficial Roth conversions.

Note that starting in 2026 all Catastrophic plans will qualify as high deductible health plans, allowing deductible HSA contributions. These deductions can help with Roth conversion and other tax planning.

Conclusion

Think twice when you hear fearful messages about 2026 Premium Tax Credits. For early retirees, now is the time to plan and embrace solutions. It’s also time to keep one’s ear to the ground. It’s possible that eventually some version of the Second Era’s Premium Tax Credit enhancements will ultimately be enacted.

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

Follow me on LinkedIn at @SeanWMullaney

2025 Year-End Tax Planning

It’s that time of year again. The air is cool and the New York Jets season is over. That can only mean one thing when it comes to personal finance: time to start thinking about year-end tax planning.

I’ll provide some commentary about year-end tax planning to consider, with headings corresponding to the timeframe required to execute.

As always, none of this is advice for your particular situation but rather it is educational information.

Urgent

By urgent, I mean those items that (i) need to happen before year-end and (ii) may not happen if taxpayers delay and try to accomplish them late in the year.

Taxable Roth Conversions

Before we talk about taxable Roth conversion timing, we must talk about taxable Roth conversion desirability. Taxable Roth conversion desirability has significantly declined in recent years. Many commentators have not caught up to the new reality.

Fortunately, Mike Piper knows what time it is. At the 2024 Bogleheads conference, he said “[Roth conversions] don’t usually improve financial security in retirement.” Cody Garrett and I also acknowledge and tackle the changed landscape in our new book Tax Planning To and Through Early Retirement.

Yes, there can be some taxable Roth conversions that are highly advantageous. But they tend to be much more limited in scope and scale than most commentators acknowledge. In our book, Cody and I detail the sorts of taxable Roth conversions that tend to be beneficial.

Back to timing. For a Roth conversion to count as being for 2025, it must be done before January 1, 2026. That means New Year’s Eve is the deadline. However, taxable Roth conversions should be done well before New Year’s Eve because

It requires analysis (hopefully done with up-to-date thinking) to determine if a taxable Roth conversion is advantageous,
If advantageous, the proper amount to convert must be estimated, and
The financial institution needs time to execute the Roth conversion so it counts as having occurred in 2025.

For those age 65 or older by year-end, the Roth conversion calculus should consider the new senior deduction.

Generally speaking it is not good to have federal and/or state income taxes withheld when doing Roth conversions!

Donor Advised Fund Contributions

The donor advised fund is a great way to contribute to charity and accelerate a tax deduction. My favorite way to use the donor advised fund is to contribute appreciated stock directly to the donor advised fund. This gets the donor three tax benefits: 1) a potential upfront itemized tax deduction, 2) removing the unrealized capital gain from future income tax, and 3) removing the income produced by the assets inside the donor advised fund from the donor’s tax return.

In order to get the first benefit in 2025, the appreciated stock must be received by the donor advised fund prior to January 1, 2026. This deadline is no different than the normal charitable contribution deadline.

2025 is a great time to make a donor advised fund contribution. Why? Because of the new 0.5% of income haircut on itemized charitable deductions starting in 2026. Assuming one has high income in both years, 2025 might be more desirable than 2026. I walked through an example of how the new haircut reduces itemized charitable deductions with Brad Barrett on the ChooseFI podcast.

Due to much year end interest in donor advised fund contributions and processing time, different financial institutions will have different deadlines on when transfers must be initiated in order to count for 2025. Donor advised fund planning should be attended to sooner rather than later.

Adjust Withholding

This varies, but it is a good idea to look at how much tax you owed last year. If you are on pace to get 100% (110% if 2024 AGI is $150K or greater) or slightly more of that amount paid into Uncle Sam by the end of the year (take a look at your most recent pay stub), there’s likely no need for action. But what if you are likely to have much more or much less than 100%/110%? It may be that you want to reduce or increase your workplace withholdings for the rest of 2025. If you do, don’t forget to reassess your workplace withholdings for 2026 early in the year.

One great way to make up for underwithholding, particularly for retirees, is through an IRA withdrawal mostly directed to the IRS and/or a state taxing agency. Just note that for those under age 59 ½, this tactic may require special planning.

Backdoor Roth IRA Diligence

The deadline for the Backdoor Roth IRA for 2025 is not December 31st, as I will discuss below. But if you have already completed a Backdoor Roth IRA for 2025, the deadline to get to a zero balance in all traditional IRAs, SEP IRAs, and SIMPLE IRAs is December 31, 2025.

Year-End Deadline

These items can wait till close to year-end, though you don’t want to find yourself doing them on New Year’s Eve.

Tax Gain Harvesting

For those finding themselves in the federal 0% long-term capital gains tax bracket and with an asset in a taxable account with a built-in gain, tax gain harvesting prior to December 31, 2025 may be a good tax tactic to increase basis without incurring additional federal income tax. Remember, though, the gain itself increases one’s taxable income, making it harder to stay within the federal 0% long-term capital gains tax bracket.

I’m also quite fond of tax gain harvesting that reallocates one’s portfolio in a tax efficient manner.

Tax Loss Harvesting

The deadline for tax loss harvesting for 2025 is December 31, 2025. Just remember to navigate the wash sale rule.

RMDs from Your Own Retirement Account

The deadline to take any required minimum distributions from one’s own retirement account is December 31, 2025. Remember, the rules can get a bit confusing. Generally, IRAs can be aggregated for RMD purposes, but 401(k)s cannot.

RMDs from Inherited Accounts

The deadline to take any RMDs from inherited retirement accounts is December 31st.

Can Wait Till Next Year

Traditional IRA and Roth IRA Contribution Deadline

The deadline for funding either or both a traditional IRA and a Roth IRA for 2025 is April 15, 2026.

Backdoor Roth IRA Deadline

There’s no law saying “the deadline for the Backdoor Roth IRA is DATE X.” However, the deadline to make a nondeductible traditional IRA contribution for the 2025 tax year is April 15, 2026. Those doing the Backdoor Roth IRA for 2025 and doing the Roth conversion step in 2026 may want to consider the unique tax filing when that happens (what I refer to as a “Split-Year Backdoor Roth IRA”).

HSA Funding Deadline

The deadline to fund an HSA for 2025 is April 15, 2026. Those who have not maximized their HSA through payroll deductions during the year may want to look into establishing payroll withholding for their HSA so as to take advantage of the payroll tax break available when HSAs are funded through payroll.

The deadline for those age 55 and older to fund a Baby HSA for 2025 is April 16, 2026.

2026 Tax Planning at the End of 2025

ACA, HDHP, and HSA Open Enrollment

It’s open enrollment season at work and November 1st starts ACA medical insurance open enrollment for 2026. Now is a great time to assess whether a high deductible health plan (a HDHP) is a good medical insurance plan for you. One of the benefits of the HDHP is the health savings account (an HSA).

New for 2026! All Bronze and Catastrophic ACA plans will qualify as HDHPs! This opens the door for many self-employed and early retired individuals covered by these plans to make deductible HSA contributions. These deductible contributions can increase Premium Tax Credits and lower income taxes.

As I write this in mid-October 2025, the Premium Tax Credit is in flux. I do think many early retirees and self-employed individuals will benefit from considering a Bronze or Catastrophic plan. As I’ve said before, Bronze is Gold!

For those who already have a HDHP, now is a good time to review payroll withholding into the HSA. Many HSA owners will want to max this out through payroll deductions so as to qualify to reduce both income taxes and payroll taxes.

Self-Employment Tax Planning

Year-end is a great time for solopreneurs, particularly newer solopreneurs, to assess their business structure and retirement plans. Perhaps 2025 is the year to open a Solo 401(k). Often this type of analysis benefits from professional consultations.

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

Follow me on LinkedIn at @SeanWMullaney

Tax Planning To and Through Early Retirement Launch Day

It’s finally here! Tax Planning To and Through Early Retirement launches today, September 23rd. It’s available at Amazon and other online retailers.

To mark the occasion, we discussed the book on yesterday’s episode of the ChooseFI podcast and today’s episode of the BiggerPockets Money podcast.

We will be on several more podcasts in the coming weeks and months discussing the book and its concepts.

One I’m particularly excited about is this Friday’s BiggerPockets Money podcast episode where we discuss tax planning for the five phases of retirement drawdown. You can find that episode on September 26th on the BiggerPockets Money YouTube channel and on podcast players.

I have also put two special YouTube videos on my YouTube channel discussing concepts from the book.

On Monday I posted a video discussing how the tax planning world has changed.

Today I posted a video discussing just how much tax a retired married couple might pay on a $40,700 Roth conversion using an example from the book. You might be very pleasantly surprised by the result.

A Favor Request

I speak for both Cody and myself when I say we are grateful for all of the support we have received for this project.

If you have purchased the book and read it, we humbly for one more favor. Please write an honest and objective review of the book on Amazon. The number and quality of reviews is vital to the book remaining one that Amazon recommends to its customers.

We want to get word out about Tax Planning To and Through Early Retirement. You can help us do that with an Amazon review!

Thank you for considering our request.

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

Follow me on LinkedIn: @SeanWMullaney

The Middle Class Trap

I have said the tax laws want you to retire early.

Counter to that point, the BiggerPockets Money podcast has warned that the tax laws are an effective bar to many retiring prior to age 59 ½.

So who is right? The FI Tax Guy or Scott Trench and Mindy Jensen of the BiggerPockets Money podcast?

This isn’t just a discussion in my mind or a late night debate at the Waffle House. It’s become a debate in the financial independence space. Just last week, the Middle Class Trap was the topic of the ChooseFI podcast.

We will return to that episode of ChooseFI later. For now, I want to start by defining the Middle Class Trap and providing the two reasons I don’t believe the Middle Class Trap is a trap. Then I will move onto several numerical examples, including four Mindy Jensen provided on ChooseFI.

The Middle Class Trap Defined

Scott Trench and Mindy Jensen walk through their definition of the Middle Class Trap from in this YouTube video. I encourage you to watch it.

Boiled down, the argument is that primary residence wealth is trapped and traditional retirement accounts are trapped until age 59 ½. Thus, many in the middle class have trapped wealth and cannot retire prior to age 59 ½ despite good numbers on paper.

There are two problems with their argument. First, primary residence wealth isn’t the owner’s wealth as we ordinarily conceive and define it. Second, traditional retirement accounts are not trapped prior to age 59 ½.

The Primary Residence Question

Too often we think of primary residences as investments. They are not, as Douglas Boneparth observes. They are a form of consumption.

People say “I have a million dollars in home equity so I am a millionaire.”

No, you are not.

I can prove it.

Peter has a $500 checking account, a car, clothes, and a $1 million home with no mortgage. He sells the home for $1 million. He immediately must get a hotel room to sleep in tonight.

John has a $500 checking account, a car, clothes, rents an apartment, and has $1 million in VTSAX in a taxable account. He sells $10,000 of VTSAX for cash. He now has a pile of cash and need not make any adjustments to have a bed for the night.

Is Peter’s home equity really his wealth when accessing causes significant life adjustments? John’s VTSAX is his wealth. His accessing it requires no life adjustments.

So what then is market driven appreciation in home equity? It’s growth in asset value that primarily benefits three classes of people:

The next generation
Owners willing to change geographies or willing to significantly downsize
Owners needing long-term care at the end of life

Market driven increases in home equity are not a trap. Rather, they are wealth that, in many cases, someone else gets to enjoy.

Imagine I’m writing a blog post and the doorbell rings. I answer and the delivery man says, “Mr. Mullaney, congratulations! You won a contest. The prize is $1,000 of Blippi toys!”

Those Blippi toys are my wealth that my toddler Goddaughter gets to enjoy.

It’s no different with market driven increases in home equity. It’s wealth that shows up on your doorstep that most likely will be enjoyed by the next generation.

In no way do those Blippi toys trap me. Same with market driven increases in home equity.

The 10% Early Withdrawal Penalty is No Bar to Early Retirement

I’ve written about the myriad ways to fund retirement prior to 59 ½ without incurring the 10 percent early withdrawal penalty. I’ve spoken about it on two episodes of the ChooseFI podcast (475 and 491).

But until now, I have never explicitly said the following:

Those 50 and older with sufficient assets are in no way barred from early retirement due to the 10 percent early withdrawal penalty even if all of their financial asset wealth is in traditional retirement accounts.

While 72(t) payment plans are not the ideal retirement plan, they are more than adequate enough to use to retire in the year one turns age 50 or later. Those 50 or older, with a simple spreadsheet and some diligence, are in no way barred from early retirement due to the 10 percent early withdrawal penalty.

What about those under age 50?

Few under age 50 will be able to retire on traditional retirement accounts alone because of sufficiency concerns. Tax concerns are not the problem when thinking about retiring prior to age 50 – it’s all about sufficiency!

Fortunately, the profile tends to resolve itself. To have enough financial wealth to retire in one’s 40s, the prospective early retiree most likely contributed to some combination of Roth accounts or taxable accounts prior to retirement. While not insignificant, traditional retirement account contribution limits are such that for many, it will be difficult to rely on them exclusively to build up sufficient assets for retirement prior to January 1st of the year of one’s 50th birthday. The 40-something early retiree can start their early retirement distributions from Roth accounts, taxable accounts, or a combination of both, obviously without penalty.

Summed up, when assessing the Middle Class Trap, for those under 50, their profile itself usually resolves the issue. For those 50 and older, the 72(t) payment plan rules are so advantageous (due to a major change in 2022) that a spreadsheet requiring one amortization calculation, some coordination with a financial institution, and a bit of ongoing additional diligence resolves the issue.

For both age cohorts, there is no tax trap.

Does this mean the 10 percent early withdrawal penalty has been, in effect, repealed? Hardly! If someone like me, in their late 40s, wants to take $20,000 from a traditional 401(k) to fly round-trip in a suite, I will pay a hefty 10 percent early withdrawal penalty. The penalty is still effective to discourage impulsive onetime withdrawals before retirement. But the penalty is not effective to prevent early retirements with a systematic, sustainable withdrawal plan. That’s the obvious intention behind the series of substantially equal periodic payments exception.

Examples from Mindy Jensen on ChooseFI Episode 543

Last week’s episode of the ChooseFI podcast, featuring host Brad Barrett, Mindy Jensen, and Can I Retire Yet blog author Chris Mamula was a great contribution to the FI space.

During the ChooseFI episode, Mindy offered some numerical examples to argue for her case. That is a very legitimate tactic, and I personally love examples. Unfortunately, using numerical examples ran up against a limitation of the audio podcast format, since it can be difficult for participants and listeners to fully process multiple numbers while listening to an episode.

Mindy started sharing numerical examples around 25:00 in the podcast. I went back to the YouTube video and put Mindy’s numbers in the below table. I then added a row totaling financial assets and two rows laying out theoretically possible annual withdrawal rates.

Amount	Person A	Person B	Person C	Person D
Primary Residence Value or Equity	Not given	Not given	$3,000,000	$800,000
Traditional Retirement Accounts	$268,000	$36,000	$1,200,000	$234,000
Roth Retirement Accounts	$18,000	$143,000	$0	$0
Taxable Brokerage Accounts	$187,000	$306,000	$0	$60,000
Cash	$106,000	$119,000	$225,000	$69,000
HSA	$0	$0	$35,000	$0
Total Financial Assets	$579,000	$604,000	$1,460,000	$363,000
Morningstar Annual SWR (3.7%)	$21,423	$22,348	$54,020	$13,431
Six Percent Annual Withdrawal Rate	$34,740	$36,240	$87,600	$21,780

Let’s use a range of withdrawal rates just for illustrative purposes. On the low end, we’ll use Morningstar at 3.7 percent, which can be fairly considered to be conservative. On the high end, let’s roll the dice a bit and use 6 percent.

Notice that the problem in the examples is not that the person has everything locked up in traditional accounts. The problem is sufficiency! Aside from Person C, it does not matter if all of the financial wealth is in Roth accounts, taxable accounts, or split between the two of them.

Persons A, B, and D are not in the Middle Class Trap. Rather, they are in a situation where they need to work longer unless their annual spending is incredibly modest, even by financial independence standards.

I believe that Person C could consider living on cash and later starting a 72(t) payment plan, but we really can’t tell without knowing much more information, including their age and their annual spending level in retirement.

Middle Class Trap 72(t) Payment Plan Examples

In one podcast episode, Mindy and Scott put the parameters of the Middle Class Trap at $1M to $1.5M of trapped wealth (see 3:19 of this video). How bad is the federal income tax result if we assume practically all of that wealth is in traditional deferred retirement accounts?

Using the old Four Percent Rule of Thumb for our 72(t) annual payment at both ends of the spectrum, and assuming a $40,000 taxable savings account and 5 percent interest on it and on the annual 72(t) payment taken at the beginning of the year and spent evenly during the year, here’s the 2025 federal income tax result by my estimation.

	Single $1M	Single $1.5M	Married $1M	Married $1.5M
Interest Income	$3,000	$3,500	$3,000	$3,500
72(t) Payment	$40,000	$60,000	$40,000	$60,000
AGI	$43,000	$63,500	$43,000	$63,500
Standard Deduction	$15,000	$15,000	$30,000	$30,000
Taxable Income	$28,000	$48,500	$13,000	$33,500
Federal Income Tax	$3,122	$5,584	$1,300	$3,543
72(t) Payment Funding for Expenses Other Than Federal Income Tax	$36,878	$54,416	$38,700	$56,457
Effective Federal Income Tax Rate	7.26%	8.79%	3.02%	5.58%
AGI as a Percent of 2025 Federal Poverty Level	274.76%	405.75%	203.31%	300.24%

I believe this table strongly supports my contention that the tax laws want you to retire early. Look how light the taxation is on 72(t) payments!

You may ask “I thought federal tax rates started at 10 percent – how do these people pay effective rates less than that?” The answer is the standard deduction, which loves early retirees. Because of the standard deduction, all four taxpayers enjoy what I refer to as the Hidden Roth IRA. They take some amounts from their traditional IRAs and pay 0 percent federal income tax on them.

Is the 72(t) payment plan outcome perfect? No. Those on a 72(t) payment plan have to abide by the restrictions of the 72(t) payment plan rules. But those rules are not that bad, and allow for techniques to potentially increase or decrease the annual payment.

I will note two things. First, I am not arguing anyone should simply plan on getting to an early retirement age and have every last penny in traditional retirement accounts. I am arguing that it is hardly a trap if someone gets to age 50, has every penny in traditional retirement accounts, and wants to retire using a reasonable withdrawal rate.

Second, managing for Premium Tax Credit can be a concern. At the high end of Mindy and Scott’s Middle Class Trap range, a single taxpayer would be shut out of a Premium Tax Credit (having gone a bit over the 400 percent of FPL cliff) if they were on an ACA medical insurance plan in 2026, unless later tax law changes in 2025 amend Section 36B. This person could turn on Premium Tax Credits by electing a slightly lower initial 72(t) annual payment.

Sufficiency Is The Real Problem

We should spend more time on the real problem: retirement sufficiency. According to UBS, median adult wealth in the United States in 2023 was just $112,157. Even considering that older Americans are likely to have greater wealth than younger adults, the median wealth statistic means many Americans of all ages are significantly behind in retirement savings. The best way to catch up is by making traditional retirement account contributions.

Update May 1, 2025

Thank you to Mindy Jensen who wrote a thoughtful response to this blog post. You can read it over at BiggerPockets.

Stay Tuned

This won’t be the last time you hear from me on this topic. Cody Garrett and I are currently writing Tax Planning To and Through Early Retirement, a book we hope to publish later this year. We will address all sorts of issues when it comes to accessing wealth and tax planning for those retiring prior to turning 59 ½.

What questions do you have about retiring prior to 59 ½? Let us know in the comments below and we might just answer your questions in Tax Planning To and Through Early Retirement!

Sign up for updates about Tax Planning To and Through Early Retirement here: https://www.measuretwicemoney.com/book

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

Follow my YouTube Channel at @SeanMullaneyVideos

FI Tax Strategies for Beginners

New to financial independence (FI or FIRE)? Are you steeped in financial independence, but confused about tax optimization?

If so, this is the post for you. It’s not “comprehensive tax planning for FI” but rather an initial primer on some basic financial independence tax planning tactics. I believe the three tactics here are the most compelling tactics for most pursuing financial independence.

But first, a caveat: none of this is advice for your specific situation, but rather, this comprises a list of the top three moves I believe those pursuing financial independence should consider. No blog post (this one included) is a substitute for your own and your advisors’ analysis and judgment of your own situation.

ONE: Contribute Ten Percent to Your Workplace Retirement Plan

To start, your top retirement savings priority in retirement should be to contribute at least 10 percent of your salary to your workplace retirement plan (401(k), 403(b), 457, etc.). I say this for several reasons.

It starts a great savings habit.
Subject to vesting requirements, it practically guarantees that you will get the employer match your 401(k) has, if any.
Assuming a traditional retirement account contribution, it gets you a valuable tax deduction at your marginal tax rate.
It will be incredibly difficult to get to financial independence without saving at least 10 percent of your salary.
Strive to eventually contribute the maximum allowed.

Here are some additional considerations.

Traditional or Roth

In some plans, the employee does not have a choice – employee contributions are “traditional” deductible contributions. Increasingly, plans are offering the Roth option where the contribution is not deductible today, but the contribution and its growth/earnings are tax-free in the future.

This post addresses the traditional versus Roth issue. I strongly favor traditional 401(k) contributions over Roth 401(k) contributions for most people. The “secret” is that most people pay much more in tax during their working years than they do during their retired years, even if they have significant balances in their traditional retirement accounts. Thus, it makes more sense to take the tax deduction when taxes are highest and pay the tax when taxes tend to be much lower (retirement).

Bad Investments

I’d argue that most people with bad investments and/or high fees in their 401(k) should still contribute to it. Why? First, consider the incredible benefits discussed above. Second, you’re probably not going to be at that job too long anyway. In this video, I discuss that the average/median employee tenure is under 5 years. When one leaves a job, they can roll a 401(k) out of the 401(k) to the new employer’s 401(k) or a traditional IRA and get access to better investment choices and lower fees.

Resource

Your workplace retirement plan should have a PDF document called a “Summary Plan Description” available in your workplace benefits online portal. Reviewing that document will help you figure out the contours of your 401(k) or other workplace retirement plan.

TWO: Establish a Roth IRA

For a primer on Roth IRAs, please read my Ode to the Roth IRA. Roth IRAs, like traditional IRAs, are “individual.” You establish one with a financial institution separate from your employer.

Generally speaking, a Roth IRA gives you tax-free growth, and if done correctly, money withdrawn from a Roth IRA is both tax and penalty free.

Roth IRA contributions can be withdrawn tax and penalty free at any time for any reason! The Roth IRA is the only retirement account that offers unfettered, tax-free access to prior contributions. Note, however, in most cases the best Roth IRA strategy is to keep money in the Roth IRA for as long as possible (so it continues to grow tax free!).

Find out why the Roth IRA might be much better than a Roth 401(k).

THREE: Invest in Taxable Accounts

Taxable accounts get a very bad rap. It turns out they can be incredibly valuable.

First, they tend to be lightly taxed, even during our working years. In 2025, a $1 million investment in a broad based domestic equity index fund is likely to produce less than $13,000 of taxable income. Most of that income will qualify as “qualified dividend income” and thus be taxed at favored long-term capital gains rates.

Second, taxable accounts are the perfect bridge from working to retirement. When an investor sells an asset in a taxable account, they don’t pay tax on the amount of the sale. They pay tax on the amount of the sale less their tax basis (their original investment plus reinvested dividends). Basis recovery, combined with favored long-term capital gains tax rates, makes living off taxable accounts first in retirement very tax efficient.

Conclusion

Here are the top three tax moves I believe FI beginners should consider:

First, contribute 10 percent to your traditional 401(k) or other traditional workplace retirement plan, striving to eventually contribute up to the maximum.

Second, establish a Roth IRA.

Third, invest in taxable brokerage accounts.

Of course, this post is not tailored for any particular taxpayer. Please consult with your own tax advisor(s) regarding your own tax matters.

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

Subscribe to my YouTube Channel: @SeanMullaneyVideos

Follow me on X: @SeanMoneyandTax

Basis Isolation Techniques

Basis Isolation Backdoor Roth IRA Examples

Example 1: Basis Isolation Backdoor Roth IRA into a Large Employer 401(k)

Example 2: Basis Isolation Backdoor Roth IRA into a Solo 401(k)

Is Jack’s Solo 401(k) Valid?

Contributions of Self-Employment Income

Is Jack Self-Employed?

IRA Basis Isolation and Solo 401(k) Stuffing

Tax Planning and New Businesses

Basis Isolation Backdoor Roth IRA Planning

IRA Basics

IRA Contribution Limits

IRA Contribution Deadlines

The Spousal IRA

IRA Contributions to Increase Premium Tax Credits

Split-Year Spousal IRA Contribution Example

The Spousal IRA as a Backdoor Roth IRA

Spousal IRA Tax Return Reporting

Conclusion

81 Year-Old Widow in the Widow’s Tax Trap

Roth Conversions to Avoid the Widow’s Tax Trap

Further Reading

Backdoor Roth IRA Timing Concerns

My Approach

Favored Backdoor Roth IRA Timing

Backdoor Roth IRA Diligence

Further Reading

Recharacterization

Corrective Distribution

Critical Assessment

Assessing the Corrective Distribution Remedial Path

Assessing the Recharacterization Remedial Path

Favored Approach

The Real Answer

Premium Tax Credit

Fears Over Changes to the Premium Tax Credit

The Government Shutdown

2026 Premium Tax Credit Solutions

Bronze Plan and Lower Income

Catastrophic Plan and Lower Premiums

Conclusion

Urgent

Taxable Roth Conversions

Donor Advised Fund Contributions

Adjust Withholding

Backdoor Roth IRA Diligence

Year-End Deadline

Tax Gain Harvesting

Tax Loss Harvesting

RMDs from Your Own Retirement Account

RMDs from Inherited Accounts

Can Wait Till Next Year

Traditional IRA and Roth IRA Contribution Deadline

Backdoor Roth IRA Deadline

HSA Funding Deadline

2026 Tax Planning at the End of 2025

ACA, HDHP, and HSA Open Enrollment

Self-Employment Tax Planning

A Favor Request

The Middle Class Trap Defined

The Primary Residence Question

The 10% Early Withdrawal Penalty is No Bar to Early Retirement

Examples from Mindy Jensen on ChooseFI Episode 543

Middle Class Trap 72(t) Payment Plan Examples

Sufficiency Is The Real Problem

Update May 1, 2025

Stay Tuned

ONE: Contribute Ten Percent to Your Workplace Retirement Plan

Traditional or Roth

Bad Investments

Resource

TWO: Establish a Roth IRA

THREE: Invest in Taxable Accounts

Conclusion