Both John and Bill are 50 years old. Both are told they’ll need to pay for a treatment program that costs $12,000 per month for 18 months (a total of $216,000). Both have the exact same savings:
$100,000 in a Traditional IRA (pretax account — taxed like income when withdrawn).
$250,000 in a 401(k) through work (pretax, but loans may be possible).
$100,000 in a taxable brokerage account (investments subject to capital gains tax when sold).
$50,000 in checking (cash savings).
Neither has a Health Savings Account (HSA), life insurance, or annuities in place.
A typical financial professional focuses on the simplest route:
Keep some cash in checking.
Don’t touch the 401(k).
Split withdrawals between the IRA and brokerage account to cover costs.
What that looks like:
John spends down his entire $100,000 IRA. Every dollar counts as taxable income, so at a 24% tax rate, that costs him about $24,000 in taxes.
He then sells $100,000 of investments in the brokerage account. About 20% of that ($20,000) is considered “gain,” taxed at 15% = $3,000 tax.
The last $16,000 comes out of checking to reach the $216,000 needed.
Altogether, John also has to pay about $27,000 in taxes out of his cash.
Where John ends up after 18 months:
IRA: $0
401(k): $250,000 (untouched)
Brokerage: $0
Checking: ~$7,000 (after paying the taxes)
Net investable balance: ~$257,000
On paper, John “solved the problem,” but he completely wiped out two major accounts and left himself with very little liquidity.
Instead of gutting accounts, we combine strategies to:
Preserve cash reserves (don’t leave the family with $0 emergency fund).
Spread the withdrawals across different sources to minimize taxes.
Take advantage of employer plan features (like 401(k) loans) and tools like an HSA.
Time withdrawals so the IRS rules actually help instead of hurt.
Bill’s 18-month funding mix looks like this:
$24,000 from checking. Leaves ~$26,000 behind as an emergency cushion.
$50,000 401(k) loan. Many plans allow borrowing up to $50,000 or 50% of your balance. Payments go back into Bill’s own account with interest — not to a bank.
$50,000 brokerage sales. But we only sell the investments with the least tax impact (lots with the highest purchase price and long-term status).
$32,000 securities-backed line of credit (SBLOC). This is a temporary loan using the brokerage as collateral, to avoid fire-selling investments at the wrong time.
$30,000 IRA withdrawal. But timed in a year when medical bills are so high that IRS rules let us avoid penalties, and possibly even deduct some of it.
$18,000 freed up by pausing 401(k) contributions during the crisis.
$12,000 through new Health Savings Account (HSA) contributions. If eligible, Bill contributes pretax dollars and then pays medical bills tax-free.
Taxes and interest (illustrative):
~$7,200 tax on the $30k IRA withdrawal.
~$1,500 tax from brokerage gains.
~$2,900 tax savings from HSA contributions.
Net tax bill: about $5,800 (vs. John’s $27,000).
SBLOC interest: ~$2–3k, but temporary.
Where Bill ends up after 18 months:
IRA: ~$70,000 left (vs. $0 for John).
401(k): ~$236,700 (loan outstanding, but it’s a loan to himself).
Brokerage: $50,000 left (vs. $0 for John).
Checking: ~$18,000 (vs. ~$7,000 for John).
SBLOC: $32,000 liability (to be repaid).
Net investable balance: ~$342,700.
👉 That’s $85,700 more than John right at the 18-month mark — and with much stronger account diversification.
Because Bill preserved more assets, the compounding is dramatic.
John’s Future Value: ~$606,000
Bill’s Future Value: ~$873,000
Difference: ~$267,000 more in Bill’s favor.
Tax Rate Arbitrage: We shift spending from “worst” buckets (ordinary income) into “smarter” ones (capital gains, HSA, deductible medical expenses).
Sequencing & Timing: The 401(k) loan and SBLOC buy time so we don’t liquidate at the wrong moment or wipe out retirement accounts.
Cash Flow Engineering: Pausing contributions and redirecting payroll dollars into an HSA turns after-tax dollars into pre-tax spending.
Emergency Fund Integrity: Bill always has ~$15–30k in cash on hand. John doesn’t.
These examples are hypothetical and intended for illustrative purposes only and is not indicative of the actual performance of any particular product.