The Three Buckets Most Retirees Are Missing

Most people I meet have done a good job saving. They have a 401(k), maybe an IRA, sometimes both. What they usually don't have is a plan for how to pull that money out without paying more in taxes than they need to.

That part matters more than most people realize.

The way you draw down matters as much as how much you saved

Every dollar you pull from a traditional 401(k) or IRA gets added to your taxable income that year. In Oregon, that means federal tax plus up to 9.9% at the state level. On a $100,000 withdrawal, you could be looking at 35 cents on the dollar gone before it hits your bank account.

But if you have the right mix of accounts, you get to choose where the money comes from each year. And that choice can save you a lot over a 20 or 30-year retirement.

There are three types of accounts that matter here.

Tax-deferred: Traditional 401(k), IRA

You got a tax break when the money went in. The trade-off is that everything coming out is ordinary income, taxed at whatever rate you're in that year.

These accounts also come with required minimum distributions, starting at age 73 (75 if you were born in 1960 or later). Whether you need the money or not, the IRS makes you take it. And every dollar you take out shows up as income, which can push you into higher brackets, increase how much of your Social Security gets taxed, and trigger higher Medicare premiums.

Most people have the bulk of their retirement savings here. That's not a problem on its own. But it means you'll pay taxes on it eventually, and having a plan for that is worth doing before your RMDs start, not after.

Tax-free: Roth IRA, Roth 401(k)

You paid taxes when the money went in. Everything that comes out — principal, growth, all of it — is tax-free.

In Oregon, the state gets nothing on a Roth withdrawal. That's a real advantage.

Roth accounts also have no required minimum distributions, so you're never forced to pull money you don't need. And Roth withdrawals don't count toward the thresholds that affect Social Security taxation or Medicare premiums. They don't show up in those calculations at all.

This is the most flexible account in retirement. Which makes it the most valuable.

Taxable brokerage accounts

These get overlooked because there's no upfront tax break. But they're more useful than people think.

Long-term capital gains are taxed at preferential rates, often 0–15% federally depending on your income. There are no contribution limits, no withdrawal restrictions, no age requirements. And when you pass them on to heirs, the cost basis resets at death, which can eliminate a substantial tax bill for the people who inherit them.

For someone who has already maxed out retirement accounts, a taxable brokerage is often the smartest next move.

Using all three together

The real value of having all three is flexibility. You get to choose each year.

Say you're 65, just retired, Social Security hasn't started yet. Your income is low. That's actually a window. You can pull from your traditional IRA and stay in a low bracket, or convert some of it to Roth at a lower rate than you'd face once RMDs kick in. The rest of what you need can come from Roth or your brokerage, where it doesn't push your income higher.

A few years later, RMDs start and you have less control. But if you did conversions in those early years, your traditional balance is smaller, which means smaller forced distributions. And you still have the other buckets to draw from when keeping income down matters.

Every year is its own decision. But you can only make that decision if you have options.

Which type matters most?

Which one matters most depends on where you're starting from.

If you're already maxing out your 401(k) or other qualified plan at work, the Roth is usually the next place to focus. Most people build up tax-deferred savings automatically through payroll, so that bucket tends to take care of itself. The gap is usually on the tax-free and taxable side.

If you're not yet capturing the full employer match or the tax deduction from a traditional account, that's often the higher priority first. Free money and a lower tax bill today are hard to pass up.

And if most of your savings are already tied up in tax-deferred accounts, taxable brokerage accounts start to matter too. They give you flexibility before retirement age, when your other buckets come with penalties or income limits.

In Oregon especially, where income tax takes a real bite out of every traditional IRA distribution, having some money that isn't fully taxable when you pull it out is worth a lot.

The goal isn't to maximize any one bucket. It's to have enough in each that you're never forced into a bad tax situation.

The bottom line

The people who pay the least tax in retirement aren't always the ones who saved the most. They're the ones who saved in the right places and had a plan for drawing it down.

Securities offered through LPL Financial, member FINRA/SIPC. Tallus Capital Management is another business name for Independent Advisor Alliance, LLC. Investment advice offered through Independent Advisor Alliance, LLC, a registered investment advisor and separate entity from LPL Financial.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.