Wealth-Building, Simplified: Three-Bucket Strategy Explained!

This wealth-building strategy is something that nearly anyone can use, and it can have huge impacts on your financial life. Guys, I am so excited to talk about this because it is a foundational concept when it comes to building wealth and getting your dollars to work as hard as they can. All it takes is a little bit of attention. Something else that only takes a little bit of attention, by the way, is hitting that like button, so be sure to show it some love.

Are you ready? This method is called the three-bucket strategy. You may have been hoping for some sexy secret shortcut to building wealth, but simply being intentional with where you save and invest for your future can have a tremendous effect. The three-bucket strategy, at its core, is really just a method to optimize your investments from a tax perspective.

But how does it work? What are these three buckets? Well, they’re the tax-deferred bucket, the tax-free bucket, and the after-tax or taxable bucket. And they are named that way because the investments in those accounts are taxed differently.

The tax-deferred bucket includes accounts like traditional 401(k)s and IRAs, as well as other pre-tax retirement accounts like 403(b)s, 457s, or the Thrift Savings Plan. With these accounts, you get your tax break upfront. The dollars that you contribute are deductible from your taxable income. Your investments grow tax-deferred, meaning Uncle Sam doesn’t get a cut every year as those dollars grow. Then, when you start pulling that money out in retirement, those distributions are taxed as ordinary income.

These accounts are great for taking advantage of higher-earning years because if your income when contributing is higher than you expect it to be when you retire, you’re saving money in taxes on the front end. So, let’s say you’re making $100,000 a year but you’re only going to need $50,000 in retirement. By deferring those taxes until retirement, you’re paying them on $50,000 instead of on $100,000 while you’re working.

The tax-free bucket includes your Roth accounts, like a Roth IRA or possibly a Roth 401(k), and also health savings accounts. With a Roth IRA, you pay taxes upfront on your contributions, but after years of compound growth, your retirement withdrawals are 100% tax-free. Sounds good to me. These dollars are absolute monsters in your portfolio, especially for younger investors and lower earners who are paying less taxes than they expect to in retirement.

The last and third bucket is your after-tax or taxable bucket. This is home to your regular old brokerage account. These accounts don’t have contribution or withdrawal restrictions, but they don’t have any special tax treatment either, other than the holdings inside are taxed at either long-term capital gains or ordinary income rates depending on the type of investment and how long you hold it. While it may not seem like these accounts have many perks, they can be hugely valuable tools because they’re all about flexibility. They can be used for saving beyond retirement account limits, or harnessing advanced tax strategy, or even for retiring early.

But before we get into how you apply the three-bucket strategy, you might be in a situation where your employer offers a Roth option to your retirement plan, and you need to choose whether to make Roth contributions or traditional pre-tax contributions. While we can’t make that determination for you, we do have a little rule of thumb. We suggest you add up your marginal federal and marginal state tax rate to find what’s called your combined marginal tax rate.

If that number is less than 25%, we suggest that you opt for Roth contributions. If it’s over 30%, you may want to think about traditional contributions. And if the number is between 25 and 30, the situation may be a bit more nuanced. You’ll need to assess your own personal factors, like your age and your overall time horizon, as well as your other account structures. For example, if you’re on the younger side or aren’t expecting to retire until later, you may want to focus on Roth to load up that tax-free money. If you’re older and expecting decreases in income as you approach or enter retirement, traditional may be the way to go. That’s how you can determine which deduction you want to take—now or later.

I know that was a lot, so let’s take you through a full example. Let’s assume that you’re a single filer in the state of Georgia making $50,000 a year. And let’s assume you take the standard deduction in 2025, which is $15,000. Since a standard deduction is a reduction in your taxable income, your taxable income is $50,000 minus $15,000, or $35,000.

Using the 2025 tax brackets, that puts you in the 12% federal tax bracket. That would be your marginal federal tax rate. And as of January 1st, 2025, Georgia has moved to a flat state income tax of 5.29%. So, your combined marginal tax rate would be 12% plus 5.29%, or 17.29%. Since that’s less than 25%, you may want to consider making Roth contributions since the taxes you’re paying right now will likely be lower than the taxes you’re going to pay in retirement.

To do this yourself, you can find your marginal federal tax rate at irs.gov, and you can find your marginal state rate on your state’s Department of Revenue website.

When it comes to the way that we suggest loading up these accounts, we have a little something called the Financial Order of Operations. Maybe you’ve heard of it. I’m not going to go through every step with you right now, but when it comes to filling your three buckets, here’s how this could look for most folks.

If you have an employer match, you would contribute enough to get the full match. Do not miss out on that free money. Then, if you’re eligible, you’d max out your health savings account, or maybe then your Roth IRA. If you’re over the Roth income limit, you might want to do some sort of backdoor Roth conversion strategy. After that, it’s loading up those retirement accounts and then the taxable brokerage account.

And with that, you would have built a portfolio that allowed you to effectively control the taxes that you pay in retirement. Guys, we love loading you up with this information just like you’re about to load up those three tax buckets and set yourself up for your great big beautiful tomorrow.