When it comes to savings, many of us are conditioned to pile as much money as cash flow allows into retirement vehicles such as 401(k) plans and IRAs, year after year.
Obviously, there is real merit to this advice. Contributing to a company retirement plan often allows participants to reap multiple benefits, including immediate tax savings and “free money” if your employer offers a matching contribution. IRAs give investors the opportunity to double down on those annual tax savings or, in the case of a Roth IRA, provide a means of tax-free growth and distribution.
The Three Buckets of Money
In the world of finance and savings, there are three main buckets of money. We have already referenced two of them: the tax-deferred bucket (Traditional 401k/IRA) and the tax-free bucket (Roth).
The third bucket—what I am going to refer to as the “taxable” bucket—often ends up as the forgotten means of savings.
Taxable savings are funds that have already been taxed before they are invested (e.g., individual brokerage accounts, joint brokerage accounts, and trust accounts). Once invested, the original contribution (the principal) is never taxed again. Only the growth of those funds is taxed, and it is taxed at the capital gains rate—which is almost always less than your marginal income tax rate.
While very little is written about this part of investor savings, the taxable bucket can and should be a critical part of your overall wealth strategy.
The Danger of Being “IRA Heavy”
So, why is the taxable savings bucket so important? Let’s look at a common retirement scenario.
Imagine you are married, file your taxes jointly, and are between the ages of 60 and 70. You have not yet started receiving Social Security benefits, and you don’t have a pension. Your only source of income is your investment portfolio, and you need $150,000 a year to maintain your desired standard of living.
If you did an excellent job saving to traditional retirement vehicles over the years, you likely have a sizable sum in your 401(k) and IRA. Maybe you have a couple hundred thousand dollars in your joint taxable account, but you feel uncomfortable depleting it so early in retirement.
In that case, your income source is going to be your pre-tax accounts. Generating $150,000 in income in 2026 as a joint filer puts you in the 22% marginal tax bracket. Because you need a net of $150,000 to fund your lifestyle, doing some quick math means you will actually need to pull out nearly $180,000 from your IRA. You still remain in the 22% bracket, but you’ve just generated a nearly $30,000 tax bill.
The 0% Capital Gains Advantage
On the other hand, let’s say you have a joint brokerage account valued at $1,500,000. If you take the full $150,000 from the joint account, only the growth is taxed.
Even if we assume a full 50% of that withdrawal is capital gains (which is unlikely, as most portfolios turn over and not all investments are sold at a gain), you are left with $75,000 in taxable gains.
For joint filers in 2026, the first $94,050 in long-term capital gains is taxed at 0%.
Admittedly, most of us will have other forms of income—interest from a bank account or dividends from mutual funds—which means our capital gains stack on top of our ordinary income, potentially pushing some of those gains into the 15% bracket. But the point remains: there is a massive tax difference between accessing $150,000 from a pre-tax account versus a taxable account.
What About Historical Tax Savings?
Some of you might be thinking I am ignoring all the tax savings this theoretical investor accrued over the decades by deferring taxes into their 401(k). That is a fair point.
However, today’s tax brackets are incredibly attractive compared to historical rates, and we don’t know what the future holds. For context, the top marginal tax rate in the mid-1940s was 94%. In the 1950s and early 1960s, the top bracket was 91%. From 1965 to 1981, it was 70%. In today’s historically low tax environment, paying taxes on earned income now and investing the remainder in a taxable account is a highly efficient strategy.
Fueling Proactive Tax Strategies
One last consideration: Roth conversions.
The best time to convert pre-tax money to a Roth IRA is the window between your retirement and when you are forced to start taking Required Minimum Distributions (RMDs) or Social Security. Assuming you have a few years between those events, converting significant parts of your pre-tax accounts to Roth dollars makes a lot of sense.
However, to make the conversion mathematically optimal, you need to pay the resulting tax bill with cash from outside the IRA. Once again, this emphasizes the importance of having a substantial sum of money in a taxable account when you retire.
As a friend told me recently, “I am cash poor and IRA heavy!” Avoid that trap. Don’t let anyone tell you that saving to a joint or individual brokerage account isn’t a critical part of your plan. The sooner you start funding this third bucket, the more options you will have in the distribution phase of your life.
