The Tax Efficiency Ladder
The funding order for a physician household's accounts, climbed as rungs rather than chosen from as a menu.
What it is
The Tax Efficiency Ladder is Financial Fellowship's funding order for a physician household's accounts, a sequence of rungs climbed in order rather than a menu chosen from.
The order changes the outcome more than the amount does, because each rung differs in how the money is taxed on the way in, while it grows, and on the way out.
The rungs
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1
The workplace plan, up to the full employer match
The match is compensation the household has already earned and has not claimed.
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2
The health savings account, if the household is on a qualifying high deductible plan
It sits above the Roth rung on purpose, because it is the only account that can go in untaxed, grow untaxed, and come out untaxed for qualified expenses. Most funding orders put it lower, and that is the most common ordering mistake in physician planning.
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3
The workplace plan, to the annual limit
The workplace plan, to the annual limit.
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4
A backdoor Roth contribution for each spouse
Most attending households are above the income threshold for a direct Roth contribution, which makes the backdoor route the standard path. The pro rata rule has to be cleared first. A household with existing pre-tax IRA balances can trigger an unexpected tax bill by executing this step out of order, and that single detail is the difference between a clean conversion and an expensive one.
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5
Additional employer plans the household has access to
Some employers offer a second deferred plan, and self-employed or 1099 income opens a separate plan on top of the first.
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6
A taxable brokerage account, managed with attention to asset location
Which holdings sit in which account type.
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7
Education and other tax-advantaged accounts, as capacity allows
Education and other tax-advantaged accounts, as capacity allows.
Where it shows on the show
It applies the moment a household has more to save than one account can hold, which for most physician households is the first attending year.
It applies whenever the household gains access to a new account type. A new employer, a second plan, a spouse starting work, or the first dollar of 1099 income all change which rungs exist.
It applies before a household adds a taxable account. Money placed in a taxable brokerage while a higher-value rung is still unfilled is money that paid tax it did not have to pay. It applies at every year end, as a check on whether the rungs actually got filled in order. It applies with particular force to any household holding pre-tax balances in an IRA, because those balances interact with the backdoor Roth rung.
Financial Health Assessment episodes built on the Tax Efficiency Ladder are listed here as they publish. Physician households can submit their own finances at financialfellowship.com/submit.
What it is not
It is not tax advice. It does not publish contribution limits, income thresholds, or tax rates anywhere, because those figures change and a saved figure becomes a wrong one. Current numbers come from the IRS or a tax professional who knows the household.
Takeaways
- Climbed as rungs, not chosen from as a menu.
- The health savings account sits above the Roth rung on purpose.
- The pro rata rule has to be cleared before a backdoor Roth.
- Does not publish contribution limits, thresholds, or tax rates.
- The order changes the outcome more than the amount does.
Common questions
Why does the health savings account come before the Roth?
Because it is the only account that can be funded untaxed, grow untaxed, and be withdrawn untaxed for qualified expenses. No other rung offers all three.
What is the pro rata rule and why does it matter here?
It determines how a Roth conversion is taxed when a household holds existing pre-tax IRA balances. A backdoor Roth executed without addressing those balances first can produce a tax bill the household did not expect.
Does the Tax Efficiency Ladder list contribution limits?
No, deliberately. Limits change and a published figure becomes wrong. Current figures come from the IRS or a tax professional.
Is the order the same for every household?
The rungs are the same. Which ones exist depends on the household's employer, plan access, and whether there is self-employment income.