Brian Dress, CFADirector of Research, Investment Advisor, Left Brain Wealth Management, LLC · Wealth Strategy for Corporate Executives & High-Net-Worth Investors | Concentrated Stock & Equity Compensation Planning | Director of Research | CFA | Left Brain Wealth Management

3 Tax Buckets Every Wealthy Investor Should Know #retirementplanning #TaxPlanning #wealthmanagement

14 Oct 2026 · 3 min

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In this interview, Nolan explains the three tax buckets that wealthy investors typically use to structure their retirement holdings. Bucket 1 is the deferred bucket, comprising tax‑deferred accounts such as IRAs, 401(k)s, 403(b)s, and certain annuities; contributions are untouchable until a required minimum distribution age (75), and withdrawals are taxable and may incur penalties if taken early. Bucket 2 is the tax‑free bucket, primarily Roth IRAs, where qualified distributions are tax‑free, making it the optimal place for high‑growth assets that will benefit from tax‑free appreciation. Bucket 3 is the freedom (after‑tax brokerage) bucket, funded with post‑tax money, where the investor has a cost basis and must report gains, losses, and income each year; this bucket provides liquidity before age 59½ and is used for assets that generate taxable income or qualified dividends. Nolan stresses that the same securities should not be held in every bucket because each bucket’s tax consequences differ; growth assets belong in the tax‑free bucket, qualified‑dividend or tax‑qualified assets can sit in the brokerage bucket, and the deferred bucket’s activity is tax‑neutral until distribution. By strategically allocating assets across these buckets, investors can control annual tax liability and improve after‑tax retirement outcomes.

So most wealthy investors don't just have exactly one portfolio. They actually have 3 different tax buckets. Nolan, walk us through each of those tax buckets and why we don't necessarily want to own the same investments in each one.
Yeah, so my Tax Bucket 1, this is my deferred bucket. IRAs, 401s, some annuities, 403 plans. They go in my Bucket 1. That's my restricted bucket. It's good money, but I can't touch it to a certain age. I have to take out a certain amount at age 75, and my distributions are taxable. If I take it out early, I'm penalized, so I need to be careful. Bucket number 2 is my tax-free bucket, mostly consists of Roth IRA money, and if I do my distributions right, all of that distribution should come to me in, in a tax-free manner. And bucket number 3 is my freedom bucket. This is my after-tax brokerage account money. I funded it with after-tax money, So I have a cost basis in the security. So when I go to liquidate, all of the liquidation doesn't hit on my tax return. Okay. So those are the, the 3 buckets. And when we think about generating income and distributing income, a lot of this depends on my age and my tax bracket. Before 59½, bucket 1 and usually bucket 2 are off limits. So now I'm totally beholden on bucket number 3. Depending on the type of investments I own in bucket number 3, that determines how much income that account is generating and what tax consequences will accrue to me.
So tell me, why is it that we shouldn't have the exact same types of securities in all 3 of those buckets?
The tax consequences for each are different. For the tax-free bucket, which I'm gonna get my money tax-free at some point in the future, I generally want my highest growth assets there because I'm gonna get that return tax-free. In my restricted bucket number 1, all of the activity there doesn't hit my 1040 until I do a Distribution. So really capital gain, capital loss really don't matter. And the income that's generated inside the portfolio doesn't matter either. All of that is deferred. So on an annual basis, I see no action that I need to put on my 1040. Bucket number 3, the freedom or brokerage bucket assets. These assets generate activity that do go on my 1040 every single year. So if I have things that are tax-free, I probably want them in bucket number 3. If I have assets that are tax qualified, which means I'm taxed at a lower rate, like qualified dividends and other assets, that might be appropriate for bucket number 3 as well. We can own growth assets in bucket, bucket number 3 because as long as we don't sell them, we do get a deferral of capital gains.
So it's all about controlling the taxes as much as you can with the buckets concept. So it's not just what we own, it's also where we own it. And over a long retirement, that can make a meaningful difference.