Ch5. Personal Finance — Tax Minimization Strategies

The Optimal Account Funding Order

Following this order maximizes tax efficiency:

1. 401(k) up to employer match (free money — 100% immediate return)
2. HSA to maximum (triple tax advantage if eligible — see below)
3. Roth or Traditional IRA to maximum ($7,000 /$8,000 if 50+)
4. Back to 401(k) to maximum ($23,500 /$31,000 if 50+)
5. Taxable brokerage (for investments beyond tax-advantaged limits)

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The HSA: The Most Powerful Tax Account

The Health Savings Account (HSA) has a triple tax advantage — the most of any account in the US tax code:

1. Pre-tax contributions reduce taxable income
2. Tax-free growth within the account
3. Tax-free withdrawals for qualified medical expenses (now or in the future)

After age 65: Withdrawals for any purpose are taxed as ordinary income (like a Traditional IRA) — making this also a stealth retirement account.

2025 HSA limits: $4,300 (individual) /$8,550 (family)

Eligibility: Must be enrolled in a High-Deductible Health Plan (HDHP)

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Roth vs. Traditional: Which to Choose?

Factor	Choose Roth	Choose Traditional
Current tax rate	Low (early career)	High (peak earnings)
Future tax expectation	Higher	Lower
Flexibility	More flexible	Less (RMDs at 73)
Income limit	Phase-out at $150K+ (single)	No limit for deduction eligibility at work

Backdoor Roth IRA: High earners who exceed Roth income limits can still contribute via Traditional IRA → Roth conversion. Legal and widely used.

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Tax-Loss Harvesting

Strategy: Sell investments at a loss to offset capital gains (and up to $3,000 of ordinary income per year).

How it works:

1. Stock A falls 20% — sell it and realize the loss
2. Immediately buy a similar (not identical) ETF to maintain market exposure
3. Loss offsets gains; remaining loss carries forward to future years

Warning: Avoid wash-sale rule — cannot buy the same or “substantially identical” security within 30 days before or after the sale.

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Next: Insurance & Risk Management — essential vs. unnecessary insurance, term life vs. whole life, and how to avoid over-insuring.