April 5, 2024

Mastering the 3-Bucket Approach to Long-Term Savings

Crafting a secure financial future can feel like navigating a labyrinth, with complex options like IRAs and investment accounts presenting a seemingly impenetrable language. However, a well-defined strategy exists to organize your resources and present opportunities to save and prepare for all financial goals. This guide delves into the 3-bucket approach, a powerful yet straightforward framework for securing your long-term financial well-being.

The 3-Bucket Approach:

1.   The Traditional IRA: Contributions to this bucket are tax deductible now and remain shielded from taxes until the time of withdrawal in retirement. This strategy potentially benefits individuals anticipating lower tax brackets later in life and is taxed as ordinary income.

2. The Roth IRA: With this bucket, you contribute after-tax dollars, but qualified withdrawals in retirement are entirely tax-free. This provides ultimate flexibility and potential tax advantages depending on your future tax situation.  

3. The Investment Account: Penalty-Free Alternative: This third component is taxed on a completely different schedule: capital gains, which are the difference between what you paid for the asset and the sales price. There are no withdrawal penalties to consider, as with IRAs before 59.5, which offers a compelling option for investing for long-term growth while maintaining liquidity. Depending on how much you make, capital gains rates can be lower (sometimes significantly) than your ordinary income rate. 

Traditional and Roth IRAs:

While both accounts offer tax benefits, which is best for your own situation depends on an expectation of what your anticipated future tax rates will be. Simply put, if you expect to be in a lower bracket in the future, it makes sense to tax the tax deduction now; if you expect to be in a higher bracket in the future, a Roth contribution would be advisable. 

That is a simplified determination and ultimately, the decision between pre-tax and Roth depends on your unique financial situation. We find that a comprehensive, personal financial plan gives clarity and provides direction for which decision makes the most sense for you. 

The Investment Account:

Often overlooked, this bucket represents accessibility and adaptability. Unlike IRAs with withdrawal penalties prior to age 59.5, you can access your funds penalty-free to pursue various aspirations:

  • Down Payment Dream: Wanting to find your forever home? Looking into buying a new car? Utilize your investment account to save for that down payment without incurring tax penalties but still getting long-term growth.
  • Lifelong Adventures: Whether it's a once-in-a-lifetime trip or a dream wedding, your investment account can help facilitate those experiences you’ve been saving for.
  • Bridging the Funding Divide: If contemplating an early retirement, an often-overlooked consideration is how to fund the years between retirement and the point at which withdrawals from IRAs become penalty free: 59.5. Enter the investment account… 

Maximizing Flexibility: Utilizing Investment Accounts in Retirement-

If you’re looking for an early retirement, investment accounts can help fund the gap years between retirement and when penalty-free withdrawals begin. For those with income-based health insurance premiums, withdrawing from investment accounts presents a compelling option: only the amount of gain is taxable, and is typically taxable at a lower rate than ordinary income tax. This allows for strategic management of distributions to ensure the amount of taxable income is limited. 

Later in retirement, investment accounts give flexibility and allow for pulling from different account types to tactically navigate important income levels: ordinary income, capital gains, and Medicare brackets are all top of mind when managing distributions from accounts. This especially becomes an issue when required distributions begin. 

IRA tax advantages make them the cornerstone accounts when planning for retirement. However, many often overlook the flexibility an investment account gives at all stages of your retirement journey. Navigating the best savings allocation strategy within the 3-bucket framework can be simplified through a comprehensive financial plan. Reach out to discuss how a financial plan could help get you on the path towards your financial goals.


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.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Download the free retirement timeline checklist

A short guide to understanding what happens at different ages throughout retirement - for example:

  • Age 50 - Catch-Up Contributions for 401(k)s, employer-sponsored plans, and IRAs begin. $7,500 for 401k ($30,500 total), $1,000 for IRAs ($8,000 total)
  • Age 55 -Certain employer-sponsored retirement plans allow distributions without penalty beginning at age 55. HSA contributions are now eligible for a $1,000/year additional catch up for those over age 55.
  • And more
Oops! Something went wrong while submitting the form.