One of things that becomes clear when pursuing FIRE is that flexibility and adaptation become extremely important as you execute your plan. As you gain additional understanding of more complex issues as you approach your objectives it helps to be able to revise your plan.
For instance, you should have a plan for spending down assets. However, when just starting out on the path to FIRE you’re more focused on creating wealth rather than spending it. When accumulating assets our withdrawal plan was pretty basic because there hadn’t been much thought given to it. First, we’ll draw down our investment accounts, then the tax deferred accounts, and finally the tax-free accounts. Not complex, straight forward.
Yet as we continued to save and got closer to FIRE, there was a realization that there needed to be a little more thought put into how exactly to execute that plan. Perhaps the simplicity of drawing down each of those buckets in sequential order wasn’t the best approach.
Rethinking the Health Savings Account
For instance, when first funding a Health Savings Account (HSA), I knew it would play a part in our retirement accounts but didn’t think through how to integrate it into the withdrawal plan. Generally, I thought it was a great opportunity to save on a pre-tax basis, giving us an immediate tax benefit. As for where it fit into our drawdown plan? Well, it’s a tax-free account like our Roth accounts. Therefore, it would be part of the third group of Roth accounts to be drawn on after all investment and tax-deferred accounts were depleted.
But that’s no longer the plan. We’ll have medical and healthcare expenses throughout our retirement. Using tax-free HSA distributions to offset medical expenses going forward makes better tax planning sense than waiting until our 80’s or 90’s. By using some of the HSA, we’ll reduce the need to use taxable investment accounts or tax-deferred accounts, thereby potentially saving on capital gains taxes and/or ordinary income taxes.
For now, we are fortunate to have access to a generous healthcare plan through my wife’s employer and with some good luck and good health won’t need to tap into the HSA until later. In the meantime, it has some time to grow in value to help fund those expenses in the future.
To give you a sense of our positions in different accounts I’ve added the chart below which displays how I view and categorize them: Investment, Tax Deferred, Roth, and Health Savings Account. It shows their proportional size to each other and you can see how, as described in an earlier post, tax deferred accounts were a focus of ours due to the tax break when funding them. You can also see that a Health Savings Accounts wasn’t available to me until much later in my career and what a tiny portion of our assets it represents.

Tapping into Investment Accounts
I’ve also given some thought to tapping into our taxable investment accounts going forward. Some of our investment accounts were funded nearly 15+ years ago and have had time to grow. As a result of that time, several will have substantial capital gains taxes to pay once they are liquidated. To reduce our future capital gains tax liability, we will harvest some of the gains while we have limited earned income and reinvest in the same investment. While having limited earned income this should put us in the 0% capital gains tax bracket until we start drawing down our tax deferred accounts down the road.
By liquidating and reinvesting the money, we will have the benefit of resetting our cost basis to a higher value. Unlike tax loss harvesting, which requires a 30-day window before buying a substantially similar investment, tax gains harvesting has no restriction on reinvestment. We’ll be able to reinvest into the same investments creating the stepped-up basis.
In a few years, when we anticipate having no earned income, we’ll be able to harvest tax gains to a greater extent or if we need cash for our expenses, liquidate some of the investments with little or no capital gains taxes.
Tax-Deferred Account Distributions
As far as waiting until our taxable investments run dry before tapping our tax deferred accounts, that probably is no longer true. Certainly, we’ll wait until age 59½ to avoid the 10% early withdrawal penalty, but once that age threshold is reached, we may begin limited distributions from our 401(k) and 403(b) accounts.
After doing some limited modelling of potential income streams, it may make sense to take small amounts of tax deferred distributions in our early 60’s while remaining in the lowest tax brackets and paying the lowest taxes.
This will serve two purposes. First, it will stretch our taxable investments a bit further which will only be subject to capital gains taxes (and potentially within the 0% capital gains tax bracket). Second, it will reduce the amount of future Minimum Required Distributions (MRDs) we will need to take once we turn 70½. By lowering future MRDs, there is the potential for lowering the total taxes in the future.
Last but not least Roth
It’s anticipated that the Roth accounts can be liquidated for unexpected one-time large expenses along the way. By taking distributions from the Roth accounts, we can avoid additional distributions from the tax deferred accounts and attempt to keep our tax liability in check. The tax-free accounts can also be preserved for long-term care services should the need arise, again without pushing income taxes higher.
If we’re lucky enough not to need the Roth accounts, they will continue to provide a financial buffer for the unexpected and can eventually be passed along to our heirs in a tax efficient way.
If nothing else, I’ve learned that our planning has to be fluid and evolving. Expenses and taxes are unpredictable and change over time – especially over 40+ years of a projected retirement. No one plan can cover it all. Realizing up front that you’ll have to be fluid and adapt will lessen the stress. Having multiple types of accounts with varying tax obligations gives the flexibility to draw on one or more of them depending on the situation.
Are you anticipating changing or adapting your withdrawal strategy over time? What considerations have you thought of? Share your insights and thoughts in the comments below.
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