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

Finance-focused summary: “3 Tax Buckets” (Tax Diversification in Retirement)

Core concept

The speaker argues there’s no “perfect” mix—but there is a perfect structure: tax diversification using three main retirement “baskets” (plus an optional 4th: HSA).

Goal: reduce lifetime taxes and regain control over which income sources drive:

• Taxable income
• Social Security taxation
• Medicare premiums (especially as withdrawals rise with age)

---

The 3 (plus 1) tax “baskets”

1) Tax-deferred basket

Accounts/instruments

• Traditional 401(k)
• Traditional IRA

Tax mechanics

• Tax break today
• Growth is tax-deferred
• Withdrawals are taxed as ordinary income in retirement

Key risk: Required Minimum Distributions (RMDs)

• Trigger age referenced: 73 (or 75 for those born in 1960+)

Example math (first-year RMD)

• If traditional balance = $1.5M, divisor 26.5 → forced withdrawal ≈ $56,600
  • If only need $38,000 to live, the remaining ~$19–20k becomes extra taxable income
• If balance = $2.0M, forced withdrawal ≈ $75,500 first year

“RMD snowball” effect As balances grow, forced withdrawals grow and can simultaneously increase:

1. Marginal tax bracket
2. Taxation of Social Security (up to 85% taxable)
   • thresholds: $34,000 (single) / $44,000 (couples)
   • noted as not inflation-adjusted
3. IRMAA (Medicare premium surcharge)
   • 2026 thresholds: >$109,000 (single) / >$218,000 (couples)
   • first IRMAA level adds about $1,100/year per person

Recommendation/intent

• Avoid letting the tax-deferred bucket grow so much that RMDs force bracket increases.
• “Target concept”: use the tax-deferred bucket to fill lower brackets (specifically cited 10% and 12% years).

---

2) Roth basket

Accounts/instruments

• Roth IRA
• Roth 401(k)

Tax mechanics

• Pay taxes now
• Growth and qualified withdrawals are tax-free

Key advantage: no mandatory withdrawals

• Speaker references no RMDs from 2024 onward for Roth IRA and Roth 401(k).

“Freedom” in retirement Roth withdrawals generally don’t count as taxable income for the calculations described, enabling flexibility near:

• Social Security thresholds
• IRMAA thresholds

Important liquidity rule

• Roth contributions can be withdrawn any time without penalties.
• Earnings generally require:
  • age 59.5, and
  • the 5-year account rule to withdraw tax-free.

Legacy benefit

• Inherited Roth dollars are described as not subject to federal income tax.
• Heirs typically have 10 years to empty the inherited Roth.

---

3) Taxable brokerage account

Instruments

• Generally referred to as taxable brokerage
• Later suggests using low-cost index funds or ETFs (no tickers provided)

Key advantages

• No age restrictions
• No early withdrawal penalties
• No RMDs
• Acts as a “bridge” for transition years (e.g., retiring before 65 and before Social Security begins)

Tax treatment

• Long-term capital gains taxed at capital gains rates (lower than ordinary income)
• Tax-loss harvesting: sell losing assets to offset gains
• Investor can control timing of income recognition

Death/basis step-up claim

• Speaker states the account receives a basis value increase, so long-term earnings pass to heirs and “old tax liabilities” are effectively canceled.

---

4) (Optional) HSA bucket

Account

• HSA (Health Savings Account)

Why it’s “extremely tax-advantaged”

• Deductible contributions
• Tax-free growth
• Tax-free withdrawals for medical expenses

Contribution limits mentioned (2026)

• $4,400 (individual)
• $8,750 (family)
• plus $1,000 catch-up if age 55+

Non-medical withdrawals

• 20% penalty + taxed like an IRA

After age 65

• Per speaker: non-medical withdrawals become taxable (penalty removed), while medical withdrawals remain tax-free.

---

Strategy / methodology framework (as presented)

• Build a distributed withdrawal plan across:

  • Tax-deferred (Traditional 401k/IRA) to strategically fill 10%/12% brackets
  • Roth (Roth IRA/401k) for tax-free flexibility and to avoid triggering Social Security/IRMAA consequences
  • Taxable for early/transition years and efficient gain/loss management

• Use low-income years for Roth conversions

  • After stopping work but before Social Security and RMDs begin
  • Target staying within 10% and 12% brackets

• If the portfolio is concentrated in one bucket, rebalance by:

  • redirecting future contributions
  • opening/adding to a taxable brokerage
  • converting strategically in low-income years

• Use the taxable account as a “shock absorber”

  • Especially for health insurance subsidy impacts
  • Large taxable capital gains could affect subsidies, while Roth withdrawals are excluded from the described income calculation.

---

Key thresholds, numbers, and timelines (explicitly mentioned)

RMDs and bracket impacts

• RMD start age: 73 (or 75 if born 1960+)
• Example divisor: 26.5 for a first-year RMD example at age 73

Social Security taxation thresholds

• Up to 85% of Social Security may be taxable
• Thresholds:
  • $34,000 (single)
  • $44,000 (couples)
• Not inflation-adjusted (per speaker)

IRMAA (Medicare premium) thresholds

• 2026 thresholds
  • >$109,000 (individual)
  • >$218,000 (couples)
• First IRMAA level adds about $1,100/year per person

Roth conversion bracket numbers (2026)

• 12% bracket ceiling (as cited):
  • up to $50,400 for individuals filing separately
  • up to $100,800 for married couples
• Core claim: Roth conversions are best when taxable income can be kept inside 10% and 12%.

“When tax diversification starts to matter” (traditional account balances)

• < $250,000: taxes likely not the primary problem; withdrawals around $10k–$12k/year; Medicare surcharges “nearly impossible.”
• $250,000–$600,000: taxes start mattering; conversion into Roth at 10%/12% becomes beneficial; Social Security taxation risk rises.
• $600,000–$1.2M: “extremely beneficial”; RMDs can exceed $50,000; Social Security may be up to 85% taxable.
• > $1.2M: tax planning becomes a major lever; forced withdrawals and allowances accumulate; potential to save tens of thousands over 25–30 years (possibly more).

HSA contribution timeline

• Contribution limits referenced specifically for 2026.

Withdrawal planning sequence guidance

• Conversion window described as:
  • after stopping work but before Social Security and RMDs begin (“cheap” period)

Decade guidance for action

• 40s: plenty of time to change outcomes
• 50s: best years for redistributing contributions
• 60s: less time, but conversion may still be open
• 70s: choices narrow; still valuable to manage withdrawal sequence and smaller conversions

---

Explicit recommendations / cautions

• No universal exact allocation; depends on individual circumstances.
• Speaker’s general lean allocation: ~1/3 tax-deferred + 1/3 Roth + 1/3 taxable.
• Major caution: concentration risk in traditional accounts
  • concentrated tax-deferred balances can create a sharp RMD-driven income spike at ~73
  • this can raise:
    • tax bracket
    • Social Security taxation
    • Medicare/IRMAA costs
• Roth conversions should generally occur when income is low enough to stay in 10%/12% brackets.
• Taxable accounts often should use low-cost index ETFs/funds to reduce annual tax burden.
• Withdrawals should be engineered to manage transition years, including health insurance subsidy eligibility concerns (with 2026 noted as stricter for subsidy income calculations).

---

Disclosures / disclaimers mentioned

• “Any investment carries risk…”
• “This is not financial advice.”
• “I am not a financial advisor.”

---

Tickers / assets mentioned

• No specific stock/ETF tickers provided.
• Categories/instruments mentioned:
  • Traditional/Roth 401(k)
  • Traditional/Roth IRA
  • HSA
  • Taxable brokerage
  • Low-cost index ETFs (general)
  • Social Security
  • Medicare / IRMAA (policy/tax context)

---

Presenter / sources

• Nolan Gouveia (aka “Professor Ji”) — sole presenter referenced.