The 3 Tax Buckets You NEED in Retirement (Ideal Mix by Portfolio Size)

Is there an ideal mix of accounts I should have when I hit retirement? What a question. I get a version of this just about every day, and most people spend decades saving and investing without ever asking it, even though it decides your tax bill for 25 or 30 straight years. Over the years I've taught thousands of university students and have consulted with CEOs, business owners, ultra high net worth individuals, and everyone in between. The problem is that we're all told to save for retirement, or just throw a bunch of money into your 401k and that'll get you safe forever. But what I can tell you after years of teaching this stuff and actually working with people through their retirement years, there is no one perfect answer, but there is a perfect framework. And it gives you more control over your retirement than almost anything else you can do. It's called tax diversification. Three buckets that work together. Actually four. And today I'll show you what goes into each one, the exact math on when this starts to matter, and how to fix your mix from wherever you're starting today. The earlier you jump on this, the better. Let's break it all down. My name's Nolan Govea, my students call me Professor G, and I made this channel to make investing simplified. Remember that all investing carries risks, so do your own research. This is not financial advice, and I'm not a financial All right, bucket number one, that's your tax deferred bucket, the traditional 401k, the traditional IRA. This is the account most people already have, and the deal it offers is simple. You get a tax deduction today, your money grows tax deferred for decades, and then you pay ordinary income tax when you take it out in retirement. Now that's an awesome tool, but the problem is if that's your only tool. Because there's a catch built into this bucket that most people don't realize until they hit their 70s. And by then, your options have narrowed substantially. It's called Required Minimum Distributions, or RMDs. And here's how it works. Once you hit age 73, or 75 if you were born in 1960 or later, the IRS hands you a table and says, you're now required to take out a specific amount every single year, whether you need the income or not. Here's an actual example so that you can understand this better. Let's say in order for you to cover your living expenses, you need $80,000 per year. You get $42,000 from Social Security, so from your 401k, you only need to pull out $38,000 per year to live very comfortably. Well, say you did everything right, and now in retirement, you've got $1.5 million in a traditional 401k at age 73. Great job, except... Here come the RMDs. The IRS divisor that first year is 26.5, so $1.5 million divided by 26.5 means you're forced to pull out about $56,600 that year. That's $56,600 of an ordinary, taxable income you didn't choose, and since you only needed $38,000, you just had to pull out an extra almost $20,000 which increased your taxes a bunch. And let's say if you had a $2,000,000 account, you're now forced to take out $75,500 in year one and the required percentage climbs every single year as you age. So if the account keeps growing, the forced withdrawals grow right along with it. Now, this is something that I refer to as the RMD snowball because it's not just taxes we have to worry about, that snowball can actually force up three different things all at once. First, it can shove you into a higher tax bracket like we just talked about. Second, it can drag more of your social security into taxation. Up to 85% of your benefits can become taxable once your combined income crosses some surprisingly low thresholds, $34,000 for singles and $44,000 for couples, and those thresholds have never been adjusted for inflation. And third, it can trigger what's called IRMAA, a surcharge on your Medicare premiums. In 2026, those surcharges start once your income crosses $109,000 single or $218,000 for a couple, and the first tier alone adds roughly $1,100 a year per person. One number moves three bills up. That's the snowball, and it's completely legal, but also largely avoidable if the planning starts early enough. So the takeaway on bucket number one, you want money here, enough to fill up the low tax brackets every year in retirement, the 10 and 12 percent brackets, because that's basically a discount tax rate. What you don't want is for this bucket to be so overloaded that the IRS ends up scheduling your income for you at 73 with those RMDs. It's a wonderful tool as part of the mix, but it's terrible if that's your entire mix. Which brings me to the bucket that Pretty much fixes everything that bucket number one gets wrong. So bucket number two is your Roth bucket. Roth IRA, Roth 401k, I call this the freedom bucket and for good reason. You pay the tax now on the way in and in exchange your investments grow completely tax free, your withdrawals in retirement are completely tax free and this, the big one, there are no RMDs ever. Not on the Roth IRA, And since 2024, not on the Roth 401k either. Think about what that actually gives you. There's just so much peace of mind in my clients that have the ability to be able to pull out extra income whenever they need it in retirement, and it doesn't add to any taxable income. The IRS doesn't even look at it as income. So when you're close to an IRMAA threshold, you pull from the Roth. When one more dollar of ordinary income would drag more of your social security into taxation, you pull from the Roth. When you need a lump sum for a roof, or a car, or helping a kid, and you don't want that expense to show up in your tax return at all, you pull from the Roth. And two more big things that people miss about this bucket. Your direct contributions, the money that you put into the Roth, can be taken out of the Roth at any point, no matter what, with no penalties. The earnings need you to be 59 and a half with the account open for five years, but the contributions themselves are accessible at any time. And if you care about legacy, Roth money is one of the most powerful assets you can leave behind. Your kids generally have to empty an inherited account within 10 years, but inherited Roth dollars come out federal tax-free instead of stacking on top of their peak earning years as taxable income. Now, of course, it's not fun to pay taxes today. But you're buying your future self so many options. And in retirement, when the brackets and the Medicare stuff and the RMD stuff starts hitting, you're going to be happy that you have these options to be able to play with. Now, the third bucket is absolutely the most underrated piece of this whole puzzle. Bucket number three is the plain old taxable brokerage account. There's no special tax treatment on the way in. And this is why a lot of people say, well, I'd rather just get the tax treatment, whether in a 401k or a Roth IRA. Which is great, those are awesome, but let me explain about this one. It gives you what the other two can't give you, which is complete flexibility. There's no age restrictions, no early withdrawal penalties, and no required distributions at all. That flexibility earns its keep fast. If you want to retire at 58 or 60 or 62, before the retirement accounts open up cleanly and before social security starts, somebody has to pay for those years. Planners call them the bridge years and the taxable account is the natural bridge. It's also where you handle the lumpy stuff, the new roof, the wedding, the once in a lifetime trip without touching the tax advantage buckets at all. And the tax treatment on this bucket is actually much better than most people assume. Long-term gains get capital gains rates which run lower than ordinary income rates. In a down year you can tax loss harvest, selling losers to offset gains, You choose when to recognize income, which no paycheck and no RMD ever lets you do. And at death, this account gets a step-up in basis, meaning decades of built-up gains can pass to your heirs with the old gains essentially wiped clean for tax purposes. Now the strategic piece that brings these buckets together. A funded taxable account is actually what makes the rest of the buckets work. And those low-income years are exactly when Roth conversions are cheapest, moving money from bucket one to bucket two while you're sitting in the 10 or 12 percent bracket. It also gives you a place to pull from in a bad year so you're not pulling from that IRA or traditional 401k that you could then be putting money into the Roth for much bigger gains down Bucket number three is just the shock absorber for the entire system. Remember, if you retire before 65, your health insurance subsidies are based on your reported income. And in 2026, the subsidy math got a lot less forgiving. One big capital gain can cost you the entire year's subsidy. Remember that Roth withdrawals don't show up in that income calculation at all. One more reason the mix matters. Now, let me give you a quick honorable mention as far as that fourth bucket that I was talking about from the beginning. Then I'll get into the ratio or actual percentages of how I think that you should use these buckets moving forward. If you're on a high deductible health plan, the HSA, the health savings account, is the single most tax advantaged account that exists. It's the only account in the entire tax code with a deduction on the way in, tax-free growth, and tax-free withdrawals, as long as the money comes out for medical expenses. For 2026 you can put in up to $4,400 as an individual or $8,750 for a family, plus an extra $1,000 if you're 55 or older. And after age 65 it gets even more flexible. Non-medical withdrawals lose the 20% penalty and just get taxed like a traditional IRA. Medical withdrawals stay tax-free forever, and medical costs in retirement are not exactly a rare event. Now don't overthink where this bucket fits. It's not necessarily a fourth pillar, because those three other buckets are huge. This one you can only put a small amount of money in each and every year, so it's not going to grow to any substantial place like the other three, but it's just a good idea to have that as an option as well. Okay, so what is the ideal ratio between those big three buckets There's no universal formula and anyone who tries to give you an exact percentage without understanding fully your entire picture is definitely just guessing and probably at the end of the day trying to sell you something. In my opinion, generally, roughly a third in the tax deferred, a third in the Roth, and a third in the taxable. For me personally, that's the direction I lean Now, since I have worked with and consulted with very high net worth individuals and people in specific circumstances, a lot of the time it actually makes more sense to be adding more to the tax deferred accounts like the 401ks, IRAs, things where you can pull down the taxes today only because they're making so much money now that it actually makes more sense. In my financial coaching one-on-one sessions with these people, I understand their entire And so we build out a strategy specifically for that, but generally speaking, for most people, they can just follow the third, a third, a third, and be very happy later in retirement. It works because each third has a job. The taxable third funds your early years and the surprises. The Roth third gives you tax-free flexibility and protects you from the snowball. And the tax-deferred third exists to be drained strategically, filling up those low brackets year after year at discount rates. Together though those three buckets let you choose how you're going to be pulling money out and what gets taxed or not and you have the option instead of letting the IRS choose for you. That's the whole point of this video. You get to take back control of your financial future. Now before anybody panics about their actual mix, let's talk about when this actually matters. Like what levels do you need to be at for you to start moving things? Tax diversification matters a lot, but only once your portfolio hits a certain size. So let's break it into tiers using traditional account balances. Under about $250,000 in traditional accounts, taxes are mostly not your problem. Typical withdrawals at that level might run $10,000 to $12,000 a year. Medicare surcharges are nearly impossible to trigger, and many retirees here owe little Little to no federal income tax at all. Especially with today's bigger standard deductions for retirees 65 and up. At this level, your focus is sustainable spending and portfolio longevity, not bucket engineering. From roughly $250,000 to $600,000, it does start to matter. Withdrawals get big enough to start dragging social security into taxation. And this is where Roth conversions in the 10% and 12% bracket start becoming genuinely valuable. For 2026, the 12% bracket runs up to about $50,400 of taxable income for singles and about $100,800 for couples. That's real room to convert at discount rates. From about $600,000 to $1.2 million, tax diversification becomes extremely helpful. RMDs can grow past $50,000 as the account compounds. Up to 85% of your social security is likely taxable, and the Medicare surcharge goes from theoretical to a very real line you're managing around. Now what if you have above $1.2 million in traditional accounts? At that level, tax planning stops being nice to have and becomes one of the most important levers you have left. The forced withdrawals get large, the surcharges compound year after year, And where you pull each year's income from directly moves your lifetime tax bill. For households up here, a good multi-bucket strategy can be worth tens of thousands of dollars over a 25 or 30 year retirement. Sometimes well beyond that depending on the situation. So find yourself on that ladder. Where are you? Where are your numbers at? Because the higher you climb, the more important it is to get this going. Which brings us to the most practical question of this video. What if your mix is wrong right now? What if you're all in one bucket? Don't worry, here's what I would do. And let me start with the good news. If you're in your 40s, 50s, even your 60s, there's time. You can absolutely move the needle. It does depend on where you're starting from. If you're all traditional, and this is extremely common among diligent savers, your goal is to slowly build the tax-free and taxable sides. Four levers. shift some or all of your future 401k contributions from traditional to Roth, especially in any year you're sitting in a lower bracket. plan strategic Roth conversions for your low-income years. And for most people, the golden window is after you stop working but before Social Security and RMDs turn on. Fill the 10 and 12% brackets with conversions year after year. 3. Start a taxable account. Even a few hundred dollars a month invested consistently in low-cost index ETFs builds meaningful flexibility over 10 or 15 years. And 4. Consider delaying Social Security if it fits your situation. Partly because those quiet years before it starts are exactly the cheap conversion window like I was talking about from before. Now what if you're all in Roth? First of all, that's a good problem to have. But for right now, if your income has climbed into some higher tax brackets, some traditional contributions right now can smooth out your tax rate and actually pull that down for right now, which could be more valuable definitely long-term. It's still a good idea to have some money in traditional 401k or traditional IRAs, especially for that capital gains tax flexibility down the road. But I'm guessing there's a larger portion of the people watching this video that are in this third group. If you have almost nothing in a taxable brokerage, which describes a lot of high savers who maxed every retirement account for 20 years, the fix is simply to point new savings at the brokerage, keep it efficient, low cost index funds or ETFs so the annual tax drag stays tiny, and a rough guide by decade. In your 40s, you have tons of time, you can reshape the whole picture. In your 50s, you still have a lot of runway. These are prime years for shifting contributions. In your 60s, time is tighter, but the conversion window is often wide open, especially if you've stopped working. And in your 70s, the options narrow, but smart withdrawal sequencing and smaller conversions can still matter. One thing that I definitely want to say plainly, because this topic definitely spurs a lot of anxiety, and I get it. Money is emotional, especially retirement money that all of your life you've been very diligent saving and putting this this away and now you have to figure out how How can I make sure that this sustains me for the rest of my life? This is not about perfection. Nobody ever nails a perfect a third, a third, a third with these buckets. The retirees that win this game and honestly feel the most relaxed are the ones that just stop funding only one bucket as soon as possible and at least start to understand this strategy coming forward. So here's what to remember, and then one very important key that I haven't addressed yet in this video, but that brings all of this together for a very successful retirement. So first the most important recap. One, there are three buckets tax deferred, Roth, and taxable, and each one solves a problem the other two can't. The deferred bucket fills cheap brackets, the Roth bucket gives you tax-free control, and the taxable bucket gives you access and flexibility at any age. Two, the danger is concentration. An overloaded traditional account eventually meets the RMD snowball at 73, where one forced number pushes up your tax bracket, your social security taxation, and your Medicare premiums all at once. Roughly a third in each bucket is the direction to lean. Three, the fix is available at almost any age. Shift future contributions, convert strategically in low-income years, and start the taxable bucket now. Control over where your income comes from is the closest thing to a superpower retirement planning offers. Now this video here is exactly what I was talking about before. This is where I go over the second part of this whole puzzle. This explains exactly how you can live off of your investments because three buckets is important, but what happens in a stock market crash? Or what happens if things are going up? Which ones do you pull from at what percentages? Watch this video now or this one to keep you going strong and investing and keep investing simplified.