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

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.