Try to split your retirement savings efforts among three different buckets, said Kevin Meehan, a CFP and the regional president of Wealth Enhancement Group in Itasca, Illinois. Those are:
• Tax-deferred: Accounts such as a 401(k) or traditional IRA, where you make pre-tax contributions and are taxed on withdrawals in retirement.
• Tax-free: Think Roth 401(k)s and IRAs, where you put in after-tax dollars that then grow and can be withdrawn tax-free in retirement.
• Taxable: This bucket includes options such as brokerage accounts and savings, where you’re taxed on interest, dividends and/or gains.
Having a mix can help you better control your tax situation in retirement, he said, because you have more flexibility on how much you withdraw, from where. Diverse savings could also be key if you plan to retire early, Stanzak said.
“We often talk about building up that taxable bucket, especially for people who want to retire early, because they may not have access to retirement accounts without a penalty,” she said.