Which Account Should Pay? Spend Taxable Dollars, Keep Roth and HSA Dollars Invested

After I max out my mega backdoor Roth and HSA and pay for family health insurance, daycare, rent, and groceries, my salary cash flow is negative. It is negative on purpose. Each month I sell some Treasury bills and spend the dividends from my taxable brokerage account, and the gap closes when the next batch of RSUs vests. On my Engineer Investor account I joked that spending my dividends instead of reinvesting them makes me a dividend bro after all.

The joke has a serious idea underneath it. The RSU bridge strategy describes how the cash moves. The reason for it comes down to which dollars get spent. When two accounts could pay the same bill, spend the dollar that would be worth the least after tax if you left it invested, and keep the one that would be worth the most. That after-tax value includes any tax you trigger by selling today, your future tax rates, withdrawal penalties, what your heirs will owe, and the risk of the position you hold.

This only makes sense for a household with plenty of taxable money to spend: a separate emergency reserve, no expensive debt, and the full employer match already captured. Running short of cash to fill a Roth is a mistake. With that in place, the rule usually means spending taxable money and leaving Roth and HSA money alone. But a traditional IRA dollar, a low-income year, an HSA headed to your children, or a thin cash cushion can each flip the answer.

Disclosure: I write both Summitward and the Engineer Investor account.

Two ways to pay the same bill

Say you have a $2,000 medical bill, money in a taxable brokerage account, and an HSA invested in the same index fund. Assume the taxable $2,000 is cash, T-bills, or shares worth about what you paid for them, so spending it triggers no meaningful capital-gains tax. Then either choice leaves you with the same total balance, $2,000 lower than before. The only difference is which account keeps its $2,000. (If the taxable dollars would come from appreciated shares, the tax on that sale is an extra cost of paying from taxable.)

If the HSA keeps it and the money eventually goes to medical costs, it grows with no tax at all. If the taxable account keeps it, the dividends are taxed every year and the growth is taxed when you sell. At a 7% return with a 1.5% dividend yield and a 15% tax rate, the $2,000 left in the HSA is worth about $15,200 after 30 years. The $2,000 left in the taxable account is worth about $12,800 after tax. The choice of which account paid a bill in year one is worth about $2,400 three decades later.

Why a sheltered dollar outgrows a taxable one

Nothing about the investment changes between the two accounts. Both can hold the same fund and earn the same pre-tax return. The gap comes entirely from tax drag, compounded.

The textbook comparison taxes the whole return every year. With starting amount $P$, return $r$, tax rate $t$, and $n$ years:

At $r = 7\%$, $t = 15\%$, and $n = 30$, $10,000 becomes $76,123 in the shelter and $56,628 in the taxable account.

That overstates the drag on a broad stock index fund, because most of an index fund’s return is price growth that is not taxed until you sell. Vanguard’s Total World Stock ETF (VT) listed a 1.5% dividend yield and 3.4% turnover as of June 30, 2026, and its Total Stock Market ETF (VTI) listed 1.1% and 2.6%.¹ Neither fund’s distribution table for September 2023 through June 2026 shows a capital gains distribution. Most of VTI’s dividends qualify for the lower rate: 93.58% in 2025, against 74.78% for VT.² The model below applies one rate to every dividend, as if all were qualified, so it understates the drag somewhat for VT and more for funds with a lower qualified share. Mutual-fund share classes and high-turnover funds can also distribute capital gains every year, which makes their drag larger than the table shows.

A more realistic model splits the return into a dividend yield $y$, taxed every year, and price growth $g = r - y$, taxed only at sale. Each year the after-tax dividend is reinvested and added to the cost basis $B$:

With $y = 1.5\%$ of the 7% return paid as dividends and the other 5.5% deferred, $10,000 grows to:

Two things stand out. The gap is real but smaller than the textbook version suggests, because a low-turnover index fund already defers most of its tax. And the gap depends heavily on time. Over ten years at a 15% rate, the shelter is ahead by about 8%. Over thirty years, by about 19%. Keeping a Roth or HSA dollar invested matters most for money you will not need for decades.

Your bracket decides the tax rate. For 2026, qualified dividends and long-term gains are taxed at 0% up to $98,900 of taxable income for a married couple filing jointly, 15% up to $613,700, and 20% above that³, plus 3.8% net investment income tax above $250,000 of modified AGI, a threshold that is not indexed for inflation.⁴ For a couple whose qualified dividends and long-term gains stay in the 0% band, federal drag on a tax-efficient stock fund can be very small, which narrows the case for protecting Roth space. State tax, non-qualified dividends, and provisions that phase in with income can still apply.

Everything here uses federal rules. States can differ: California, for one, does not recognize HSAs, so HSA earnings there are taxable each year on the state return.²⁸

Tax-free space cannot be refilled

The deeper reason to protect a Roth or HSA balance is that the shelter itself is capped. Withdrawing Roth IRA contributions does not restore the contribution room that put them there. Unless you redeposit the money within 60 days as a rollover, which you can do once in any 12-month period⁵, all you have left is that year’s regular limit: $7,500 for 2026, plus $1,100 at 50 or older.²⁹ HSA contributions have their own annual cap: $4,400 for self-only coverage and $8,750 for family coverage in 2026, plus $1,000 at 55 or older.⁶ A dollar that leaves either account has permanently given up that space.

The same applies to using a Roth IRA as an emergency fund. Roth contributions come out first, tax- and penalty-free⁷, which makes the Roth a reasonable backstop. But every contribution dollar spent on an emergency is room that will not compound tax-free again. A taxable cash or T-bill reserve should be the first line of defense, with the Roth as a last resort.

Which taxable dollar goes first

The same rule applies inside the taxable account, which is why my monthly cash comes from T-bills and dividends. Selling a share that has doubled realizes a gain. Spending a dividend that has already been taxed, or a T-bill that has no gain in it, triggers no new tax. Treasury bill interest is also exempt from state and local income tax.⁸

1. Cash, T-bills, and dividends as they arrive. These are already taxed or carry almost no unrealized gain.
2. Lots at a loss, then lots near their cost. A sale at a loss lowers your tax, and the loss offsets other gains, the same mechanism as tax-loss harvesting. Recent purchases and lots that have not risen much realize the least gain per dollar sold. Prefer long-term lots over short-term ones, which are taxed at ordinary rates.
3. Your most appreciated shares, last. Under current law, if you hold them until death, your heirs generally take a basis equal to their market value on that date, and the gain is never taxed.⁹ Appreciated shares you plan to donate are better given to charity directly.

Tax order comes after portfolio risk. If your most appreciated holding is a large position in your employer’s stock, selling some of it to cut that risk can be worth the tax, and rebalancing may call for selling the asset that has run up. Use the tax order to pick among sales that make sense for the portfolio anyway.

About the dividend-bro joke: spending a dividend is economically the same as selling a small slice of the fund, as dividends are not free money explains. Spending one is fine. The mistake is choosing stocks for their dividends, since in a taxable account a high yield forces you to realize taxable income whether or not you need the cash.

Contributions follow the same rule

The rule also runs in reverse. Sending salary to a mega backdoor Roth or an HSA while living on taxable assets converts taxable dollars into sheltered ones. My paycheck goes into the shelters, and the T-bills and dividends pay the bills. The household spends the same amount either way, and more of what is left ends up compounding tax-free. This only works for as long as the taxable side can cover the gap, which is the subject of the fourth exception below.

The HSA case in detail

The HSA version of this, paying medical bills out of pocket and leaving the HSA invested, depends on one IRS rule. In Notice 2004-50, the IRS said an account holder may reimburse a qualified medical expense in a later year and that “there is no time limit on when the distribution must occur.”¹⁰ Three conditions apply. The expense must have been incurred after the HSA was established. It must not have been reimbursed from another source. And it must not have been taken as an itemized deduction. You also need records that prove all three. The HSA investing guide covers how to keep those records.

Two details get less attention than they should.

A saved receipt is worth its face value only. The tax-free exclusion covers amounts paid for medical care¹¹, so a $2,000 bill from 2026 lets you take out $2,000 tax-free in 2056, not an inflation-adjusted amount. At 2.5% inflation, that $2,000 buys about what $950 buys today. The receipt is a license to withdraw. The wealth is in the invested balance, which has to find enough qualified expenses to come out tax-free.

Qualified expenses in retirement are usually large enough. After 65, Medicare premiums count as qualified expenses. Medigap supplement premiums do not.⁶ IRS notices name Parts A, B, and D specifically.¹² The standard Part B premium is $202.90 a month in 2026, and higher earners pay more.¹³ Fidelity estimates that a 65-year-old retiring in 2026 will spend an average of $185,500 on health care in retirement, including Part B and D premiums and excluding long-term care.¹⁴ That figure is an average, so it does not guarantee any one household enough expenses, but many retirees will have enough qualified expenses to use up a large HSA.

If it does not, the fallback is a traditional IRA. After 65, a withdrawal not used for medical care no longer owes the 20% additional tax, but it is taxed as ordinary income.⁶ Whether that fallback still beats a taxable account depends on the tax rate when the money comes out. Over 30 years at 7% with a 1.5% dividend yield, an HSA balance withdrawn for non-medical costs comes out ahead if its ordinary tax rate stays below about 16% (against a taxable account taxed at 15%) or about 25% (against one taxed at 23.8%). In the calculator below, an HSA taxed at 12% at the end still wins. One taxed at 22% never catches up with taxable stock taxed at 15%, even over 45 years. The HSA’s largest advantage comes when the money pays for medical care and the tax rate on the withdrawal is zero.

Few people use the strategy. EBRI found that 18% of HSA holders in its database had any money invested in something other than cash in 2024.¹⁵ Devenir, measuring all HSAs nationally, found that about 10% of accounts held investments at the end of 2025, although invested dollars made up 49% of the $174 billion total.¹⁶

Four cases where the rule flips

1. A traditional IRA or 401(k) dollar is worth less than a dollar

This comparison assumes you can take the withdrawal and owe no penalty. Before 59½, IRA withdrawals generally owe an extra 10% unless an exception applies.³⁰ Elective deferrals in a 401(k) generally cannot come out at all before 59½ while you still work for the employer, except for a hardship.³² For a younger investor in a low-income year, a Roth conversion usually beats a withdrawal.

A pre-tax account holds a share of the money that belongs to the IRS. Reichenstein and Meyer frame it this way: the investor owns $(1-t)$ of the balance, where $t$ is the tax rate at withdrawal, and that after-tax share grows as if it were tax-free.¹⁷

To pay a bill $E$ from a traditional IRA you must withdraw $E/(1-t_{\text{now}})$, about $13,160 for a $10,000 bill at a 24% rate. Paying from taxable instead leaves that gross amount invested, worth this much after tax when it is finally withdrawn:

If $t_{\text{now}} = t_{\text{later}}$, the fraction cancels and the traditional dollar behaves like a Roth dollar, and paying from taxable wins by the same margin as in the table. If your rate today is lower than it will be later, spending the traditional account looks better over short horizons. In one modeled case (12% rate now, 24% later, the same 7% return and 15% taxable rate), drawing the IRA comes out ahead for roughly the first two decades, after which tax-free compounding catches up. A Roth conversion in the low-rate year often beats both choices, since it pays the low rate and keeps the money sheltered.

2. Low-income years in retirement

This is the best-studied version of the question. The conventional retirement sequence, taxable first, then tax-deferred, then Roth, is a reasonable starting point. Horan showed in 2006 that with progressive tax brackets, drawing traditional IRA money to fill the lower brackets can substantially increase what is left over.¹⁸ Cook, Meyer, and Reichenstein tested strategies that fill the low brackets with tax-deferred withdrawals or partial Roth conversions while spending mainly from taxable. They found these strategies can add more than three years to a portfolio’s longevity compared with the conventional sequence.¹⁹ DiLellio and Ostrov built an algorithm that plans withdrawals using every year of the retirement at once. It matched or beat both the simple sequence and the bracket-filling rules, and the heirs’ tax rate changed which plan was best.²⁰

Industry estimates point the same way, though they come from illustrations rather than measured outcomes. Vanguard modeled up to 120 basis points a year from a tax-aware spending order, depending on the size of each account, under deliberately tax-heavy assumptions: a 35-year horizon, a 50/50 stock and bond portfolio, a 40.8% marginal income tax rate, and a 23.8% capital-gains rate.²¹ Fidelity’s hypothetical retiree cut total taxes by over 45% by withdrawing from all accounts in proportion instead of one at a time.²² The tax-aware decumulation guide covers the gap years before RMDs (age 73, or 75 if born in 1960 or later²³), IRMAA, and ACA subsidies.

3. Money you expect to leave to your children

This reversal is the least obvious. If a spouse inherits your HSA, it becomes their HSA. For anyone else, the account stops being an HSA, and its full fair market value is taxable income to the beneficiary in the year you die. That amount is reduced by any of your medical bills they pay within a year.⁶ Most non-spouse beneficiaries of a Roth IRA must empty it within ten years, but qualified distributions are tax-free.⁷ Spouses, minor children, disabled or chronically ill beneficiaries, and beneficiaries not more than ten years younger than the owner follow different rules.³¹ Appreciated taxable stock gets a stepped-up basis, so the heir owes nothing on the gain.⁹

An HSA inherited by someone other than a spouse is worth $E\,(1+r)^n(1-t_{\text{heir}})$ to them, while stepped-up taxable shares carry no tax on the gain at all. In one modeled case, $10,000 left in an HSA for 30 years at 7% and inherited by an adult child in the 32% bracket is worth about $51,800 to them after tax. The same $10,000 held in a taxable index fund (1.5% yield, 15% dividend tax) and inherited with a stepped-up basis is worth about $71,500. For a single person, or a couple after the first death, with an HSA larger than their expected medical costs, the rule flips late in life. Spend the HSA on medical bills and leave the appreciated taxable shares to the heirs.

4. The cash cushion is thin

Paying from taxable assumes the taxable money exists and is not already set aside for something else. If paying a medical bill out of pocket means carrying a credit card balance at 22%, skipping the 401(k) match, or emptying the emergency fund, take the money from the HSA. A few basis points of tax drag do not justify any of those.

The setup at the top of this guide has a specific version of this risk. With a paycheck deliberately set below expenses, a layoff or a delayed vest leaves the household with only two exits: withdrawing Roth contributions or cashing in HSA receipts. Both spend the scarce space the strategy was built to protect. That is why the RSU bridge keeps a short-term reserve in T-bills, sized to cover the time until the next vest with room to spare.

What the evidence can and cannot show

There is no historical backtest of this rule, and a backtest would not test the right thing. The advantage comes from tax law, not a market premium. Given a return path, tax rates, cost basis, and what happens to the taxable shares at the end, it can be calculated directly. Actual return paths still change its size, and occasionally its sign. A taxable account in a falling market produces losses you can harvest, which a Roth or HSA never does, and shares held until death skip the gains tax entirely. The research question is how large the effect is and when it reverses, and that work is done with models.

• Asset location. Dammon, Spatt, and Zhang found a strong preference for holding taxable bonds in tax-deferred accounts and stocks in taxable ones, because bonds carry the heavier tax burden.²⁴ Poterba, Shoven, and Sialm, using fund returns from 1962 to 1998, found that investors would have done better holding their stock mutual funds in the tax-deferred account, because actively managed funds of that era passed through large taxable distributions.²⁵ The two results do not conflict. Where a given asset belongs depends on how much tax it generates, which is the same reasoning this guide applies to spending. International asset location works through a current example.
• Uncertain future tax rates. Brown, Cederburg, and O’Doherty found that most households do best holding both traditional and Roth accounts. Traditional accounts help manage income near bracket cutoffs, and Roth accounts protect against future changes to the tax schedule.²⁶ Owning both gives you a choice each year, which a spending order should keep open.
• HSAs. Geisler argued in the Journal of Financial Planning that an HSA can build more wealth than a matched 401(k) for some savers, assuming the HSA stays invested while medical bills are paid out of pocket.²⁷ I found no peer-reviewed study of the pay-later strategy itself. Its support rests on IRS guidance and arithmetic.

One risk the models leave out is legislative. The no-time-limit reimbursement rule comes from an IRS notice, and the HSA’s tax treatment from a statute. Congress can change either.

Try it with your numbers

Choose which sheltered account you are deciding about, then move the horizon. Try the HSA that ends up taxed with the taxable shares held until death, which is the inheritance case, and a traditional account with today’s rate below the later one, which is the low-bracket case.

What we recommend

• While you are working, pay ordinary bills, including medical bills, from cash flow and taxable assets. Leave Roth and HSA money invested, and keep the receipts.
• Inside the taxable account, spend cash, T-bills, and dividends first, then loss lots and high-basis shares, and keep your most appreciated shares unless concentration or rebalancing says to sell them.
• Before any of that, make sure there is a cash reserve, there is no high-interest debt, and you are getting the full employer match.
• In low-income years, fill the low brackets with traditional withdrawals or Roth conversions instead of spending only taxable money.
• Late in life, if the money is going to heirs, spend the HSA on medical costs first and keep appreciated taxable shares for the stepped-up basis.

Key Takeaways

• When two accounts can pay the same bill, spend the dollar with the lowest after-tax value if kept, and keep the one with the highest.
• For one modeled $10,000 at 7% with a 1.5% dividend yield, a tax-free account ends 19% ahead of a taxable index fund after 30 years at a 15% rate, and about 8% ahead after 10 years.
• Withdrawing from a Roth or HSA does not restore the contribution room it used; outside a 60-day rollover, you are left with each year’s regular limit.
• An HSA receipt can be reimbursed with no time limit, but only at its face value. The HSA gains the most when the money pays for medical care; spent on anything else after 65, it is taxed like a traditional IRA and beats taxable only at a low enough tax rate.
• The rule flips for traditional dollars in low-rate years, for HSAs headed to heirs other than a spouse, and whenever paying from taxable would mean expensive debt or an empty emergency fund.

Frequently Asked Questions

Should I pay medical bills out of pocket and save the receipts?

If you have the cash flow and a separate emergency fund, yes. The HSA stays invested and grows tax-free, and IRS Notice 2004-50 allows reimbursement in any later year for expenses incurred after the HSA was opened. If paying out of pocket would mean carrying debt, use the HSA.

Do saved HSA receipts keep up with inflation?

No. You can withdraw tax-free only the amount you actually paid. A $2,000 receipt is worth $2,000 whenever you use it. The growth on the invested balance needs other qualified expenses, such as Medicare premiums after 65, to come out tax-free.

Is “spend taxable first” always right in retirement?

No. Research by Horan and by Cook, Meyer, and Reichenstein finds that filling the low tax brackets with traditional IRA withdrawals or Roth conversions, while spending mostly from taxable, can outperform the simple taxable-first sequence. The best order depends on your brackets, account sizes, and heirs.

Should I leave my HSA to my children?

A spouse can inherit it as their own HSA. Anyone else owes income tax on the full balance in the year of your death, while appreciated taxable stock passes with a stepped-up basis. If heirs are the likely recipients, spend the HSA on medical costs first in later life.

Is it worth selling T-bills or dividends instead of stock to pay bills?

In a taxable account, usually yes. T-bills and already-taxed dividends realize little or no new gain, and T-bill interest is exempt from state income tax. Selling appreciated shares realizes a gain that holding them could have deferred, or avoided entirely through a stepped-up basis.

Related Guides

• The RSU Bridge Strategy: the cash-flow system this guide explains
• The HSA Investing Strategy: contribution limits, receipt records, and who the HSA suits
• Tax-Aware Decumulation: withdrawal order across the retirement gap years
• Roth vs. Traditional: which kind of shelter to fill in the first place
• You Have One Household Portfolio: asset location across every account
• The $408k Paycheck-to-Paycheck Family: when a negative monthly cash flow is a choice

Sources

1. Vanguard, investment profiles for Total World Stock ETF (VT) and Total Stock Market ETF (VTI), data as of June 30, 2026. Equity yield, turnover, and the distribution history.
2. Vanguard, Qualified dividend income, 2025 year-end figures.
3. IRS, Rev. Proc. 2025-32, 2026 capital gains rate thresholds.
4. IRS, Questions and answers on the net investment income tax.
5. IRS, Publication 590-A, contribution limits and the 60-day rollover rule.
6. IRS, Publication 969 (2025), HSA limits, qualified expenses, distributions after 65, and beneficiary rules.
7. IRS, Publication 590-B, Roth ordering rules and inherited IRAs.
8. 31 U.S.C. §3124, Exemption from taxation; TreasuryDirect, Treasury Bills.
9. 26 U.S.C. §1014, Basis of property acquired from a decedent; IRS Publication 551.
10. IRS, Notice 2004-50, Q&A-39 (delayed reimbursement) and Q&A-45 (Medicare premiums).
11. 26 U.S.C. §223, Health savings accounts, subsections (d)(2) and (f).
12. IRS, Notice 2008-59, Q&A-29 (Medicare Part D premiums).
13. CMS, 2026 Medicare Parts A & B premiums and deductibles.
14. Fidelity, 25th annual Retiree Health Care Cost Estimate, July 2026.
15. EBRI, Trends in Health Savings Account Balances, Contributions, Distributions, and Investments, 2011-2024, August 2026.
16. Devenir, HSA assets reach nearly $174 billion at year-end 2025.
17. Reichenstein, W., and W. Meyer (2013). The Asset Location Decision Revisited. Journal of Financial Planning 26(11): 48-55.
18. Horan, S. M. (2006). Withdrawal Location with Progressive Tax Rates. Financial Analysts Journal 62(6): 77-87.
19. Cook, K. A., W. Meyer, and W. Reichenstein (2015). Tax-Efficient Withdrawal Strategies. Financial Analysts Journal 71(2): 16-29.
20. DiLellio, J., and D. Ostrov (2020). Toward Constructing Tax Efficient Withdrawal Strategies for Retirees with Traditional 401(k)/IRAs, Roth 401(k)/IRAs, and Taxable Accounts. Financial Services Review 28: 67-95.
21. Vanguard (2022). Putting a value on your value: Quantifying Vanguard Advisor’s Alpha. Withdrawal-order assumptions are listed on page 21.
22. Fidelity, Tax-savvy withdrawals in retirement.
23. 26 U.S.C. §401(a)(9)(C), required beginning date; IRS, Required minimum distributions.
24. Dammon, R. M., C. S. Spatt, and H. H. Zhang (2004). Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing. Journal of Finance 59(3): 999-1037.
25. Poterba, J., J. Shoven, and C. Sialm (2000). Asset Location for Retirement Savers. NBER Working Paper 7991; published 2004 in Private Pensions and Public Policies (Brookings).
26. Brown, D. C., S. Cederburg, and M. S. O’Doherty (2017). Tax Uncertainty and Retirement Savings Diversification. Journal of Financial Economics 126(3): 689-712.
27. Geisler, G. (2016). Could a Health Savings Account Be Better than an Employer-Matched 401(k)? Journal of Financial Planning 29(1): 40-48.
28. California Franchise Tax Board,2025 Instructions for Schedule CA (540). “California does not recognize HSAs.”
29. IRS,401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500.
30. IRS,Topic no. 557, Additional tax on early distributions from traditional and Roth IRAs.
31. IRS,Retirement topics: Beneficiary, eligible designated beneficiaries and the 10-year rule.
32. IRS,401(k) resource guide: General distribution rules.