How Many Retirement ‘Tax Buckets’ Do You Have?
Diversifying retirement savings account types can lead to more significant tax benefits and flexibility in retirement.


You’ve probably heard about a popular strategy for retirement planning: tax diversification. This involves spreading your savings across accounts with different tax treatments, known as “tax buckets.” The tax bucket system can help you minimize your tax liability and provide greater flexibility in managing retirement withdrawals.
So, do you have your money in a single tax bucket, like a traditional retirement savings account? If so, here’s more of what you need to know about having more than one tax bucket.
Taxes in retirement: Understanding ‘tax buckets’
The first thing to know is that tax buckets categorize retirement accounts based on their tax treatment. But these “buckets” are not the same as different investments you may have (e.g., stocks, bonds, etc.). That said, here are three primary types of tax buckets.

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Taxable (‘after-tax’) accounts
You make contributions to these accounts with after-tax dollars. The earnings on these investments, like interest, dividends, and capital gains, are taxable in the year they're realized.
Examples of taxable accounts include brokerage accounts, bank accounts (e.g., checking and savings), CDS, money market accounts, etc.
Tax-deferred accounts
Contributions to these accounts are typically tax-deductible, reducing your taxable income for the year. However, taxes are owed on contributions and earnings when you withdraw the money in retirement.
Traditional IRAs, 401(k)s, and 403(b)s are some examples of tax-deferred accounts.
Tax-free accounts
Contributions are made with after-tax dollars, meaning there is no immediate tax benefit. However, qualified withdrawals during retirement are tax-free, providing notable tax-free growth potential.
Some examples include Roth IRAs and Roth 401(k)s.
Benefits of tax diversification in retirement
Tax diversification can help you manage your tax liability more effectively in retirement. By having money in different types of accounts (tax buckets), you can strategically withdraw funds, which can minimize your overall tax burden.
For instance, in years when your income is higher, you might prioritize withdrawing from tax-free accounts to avoid being pushed into a higher federal income tax bracket. Additionally, a diversified approach can offer greater flexibility with your withdrawal strategy.
- For example, you might start by drawing from taxable accounts to allow tax-deferred and tax-free accounts to grow.
- Or maybe you’ll mix withdrawals based on your tax situation and financial needs.
That flexibility can help you manage your taxable income, and lower taxable income can translate into reduced taxes. Consider this simplified example.
Let’s say fictional retirees Beth and Kane each need $40,000 a year for living expenses. Beth has retirement savings in a single traditional IRA totaling $500,000 (one tax-deferred bucket). Kane, on the other hand, has diversified retirement savings across three buckets: traditional IRA: $250,000 (tax-deferred bucket), Roth IRA: $150,000 (tax-free bucket), and taxable brokerage account: $100,000 (after-tax bucket).
- Based on that example, Beth would generally need to withdraw $40,000 from the traditional IRA each year, which would be taxable as ordinary income. That could potentially push Beth into a higher federal income tax bracket.
- Meanwhile, Kane could strategically withdraw the $40,000 a year from different tax buckets. For instance, based on this example, $20,000 from the traditional IRA (taxable bucket), $10,000 from the Roth IRA (tax-free bucket), and $10,000 from the taxable bucket (the gains are taxed but often at lower capital gains tax rates).
Using this scenario, only $20,000 of Kane’s withdrawals would be fully taxable at ordinary rates, compared to $40,000 for Beth. Kane could adjust withdrawals to potentially stay in a lower tax bracket and use the Roth or taxable account to reduce taxes in high-income years.
RMDs
Remember that tax-deferred retirement savings accounts, like traditional IRAs and 401(k)s, generally require you to take required minimum distributions (RMDs) starting at age 73. These distributions are taxed as ordinary income and can increase your tax liability.
- Having some of your savings in tax-free accounts can reduce the impact of RMDs on your overall tax situation.
- As Kiplinger has reported, as of 2024, RMDs are no longer required for designated Roth 401(k) accounts.
- Inherited IRAs have different rules governing required minimum distributions.
Estate planning note: Tax-free accounts like Roth IRAs can be helpful since beneficiaries can inherit these accounts without incurring income tax on the distributions.
Tax buckets: Bottom line
Creating a tax-efficient retirement portfolio generally involves strategically balancing your contributions across taxable, tax-deferred, and tax-free accounts.
This approach could save you money for living expenses, healthcare, travel, etc. However, if you're not sure about how to minimize your tax liability or the best way to diversify your retirement savings, get guidance from a trusted and qualified financial or tax planner.
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As the senior tax editor at Kiplinger.com, Kelley R. Taylor simplifies federal and state tax information, news, and developments to help empower readers. Kelley has over two decades of experience advising on and covering education, law, finance, and tax as a corporate attorney and business journalist.
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