Can I Retire? Series — Part 5 of 12
Not all retirement dollars are created equal.
You might have $1 million saved for retirement. But $1 million in a traditional 401(k) is not the same as $1 million in a Roth IRA, which is not the same as $1 million in a taxable brokerage account. They’re taxed differently, accessed differently, and have different rules about when and how you can use them.
The calculator on caniretire.app asks you to separate your assets into three buckets for exactly this reason. It doesn’t treat your money as one big pile — because the IRS doesn’t either.
Understanding these buckets isn’t just accounting. It’s the foundation for withdrawal strategy, tax planning, and ultimately how long your money lasts.
Bucket 1: Taxable Accounts
What’s in it: Brokerage accounts, individual investment accounts, savings accounts, money market funds, CDs — anything you’ve invested with after-tax money that isn’t inside a retirement account wrapper.
How it’s taxed: You’ve already paid income tax on the money you put in. But you’ll pay taxes on the growth — dividends each year, and capital gains when you sell. Long-term capital gains (assets held more than a year) get preferential rates: 0%, 15%, or 20% depending on your income. Short-term gains are taxed as ordinary income.
Key feature: No age restrictions. You can access this money anytime without penalty. No required minimum distributions. Complete flexibility.
The catch: You’re paying taxes on dividends and realized gains every year, which creates drag on compounding. And when you sell, you’ll owe capital gains taxes on the appreciation.
Best for: Early retirees who need access before 59½, bridge income, flexibility, and assets beyond what retirement accounts allow.
Bucket 2: Traditional (Pre-Tax) Accounts
What’s in it: Traditional 401(k), traditional IRA, 403(b), 457, SEP-IRA, SIMPLE IRA, most pensions — accounts where contributions were tax-deductible (or pre-tax from your paycheck).
How it’s taxed: You got a tax break when you put money in. You’ll pay ordinary income tax on everything — contributions and growth — when you take it out. Every dollar withdrawn adds to your taxable income for the year.
Key feature: Tax-deferred growth. No taxes while the money compounds. This is powerful over decades.
The catch: Required Minimum Distributions (RMDs) starting at age 73. The government gave you a tax break — now they want their cut. You must withdraw a minimum amount each year whether you need it or not, and you’ll pay income tax on every withdrawal. Early withdrawals (before 59½) typically face a 10% penalty plus taxes.
Best for: People in high tax brackets during working years who expect to be in lower brackets in retirement. The idea is: deduct at 32%, withdraw at 22%.
Bucket 3: Roth (Post-Tax) Accounts
What’s in it: Roth 401(k), Roth IRA, Roth 403(b) — accounts where contributions were made with after-tax money.
How it’s taxed: You paid tax on the money going in. In exchange, everything comes out tax-free in retirement — contributions and growth. You will never pay taxes on qualified Roth withdrawals.
Key feature: Tax-free growth and tax-free withdrawals. The most powerful tax treatment available. A $500,000 Roth is worth more than a $500,000 traditional account because you don’t owe taxes on the Roth.
The catch: No upfront tax deduction. Contribution limits are lower than 401(k)s for Roth IRAs. Income limits can prevent direct Roth IRA contributions (though backdoor Roth strategies exist). Roth 401(k)s have RMDs — but you can roll them into a Roth IRA to avoid that.
Best for: People who expect higher taxes in retirement, tax diversification, legacy planning (heirs inherit tax-free), and late-retirement flexibility when you want income without tax consequences.
Why the Calculator Separates Them
When the caniretire.app calculator runs your simulation, it doesn’t just draw from one big pool of money. It models withdrawals from each bucket according to the tax rules that actually apply.
Pull from a traditional account? The calculator adds that to your taxable income and calculates the tax hit. Pull from a Roth? No tax. Pull from a taxable account? Partial taxation on the gains.
It also models RMDs. Once you hit 73, your traditional accounts will force distributions whether you want them or not. The calculator knows this and factors it in.
This is why the same total invested can have different outcomes depending on how it’s distributed across buckets. $1.5 million split evenly across all three buckets will behave differently than $1.5 million entirely in a traditional 401(k).
The Power of Tax Diversification
Most people put all their retirement savings into one bucket — usually traditional, because that’s where the 401(k) defaults. This works, but it limits your options.
Having money in multiple buckets gives you flexibility. In a year where you need extra cash for a big expense, you can pull from your Roth to avoid a tax spike. In a low-income year, you can do Roth conversions to move money from traditional to Roth at a low tax rate. In early retirement before Social Security kicks in, you can pull from taxable accounts while keeping traditional accounts growing.
This is called tax diversification. You don’t know what tax rates will be in 20 years. You don’t know what your income needs will be year to year. Having all three buckets gives you options that having just one bucket doesn’t.
A Quick Word on HSAs
Health Savings Accounts are technically a fourth category — triple-tax-advantaged (deduction going in, tax-free growth, tax-free withdrawal for medical expenses). For the calculator’s purposes, HSAs can be counted in your taxable bucket if you plan to use them for non-medical expenses after 65 (when they behave like a traditional IRA), or kept mentally separate if you’re reserving them for healthcare costs.
The important thing is not to double-count. Include them somewhere, but only once.
Your Homework
Take the investable assets you identified in Part 4 and sort them into the three buckets:
Taxable: Brokerage accounts, savings, CDs, money market — anything that isn’t in a retirement wrapper.
Traditional: 401(k), traditional IRA, 403(b), 457, SEP-IRA — any pre-tax retirement account.
Roth: Roth IRA, Roth 401(k), Roth 403(b) — any post-tax retirement account.
Write down the totals for each. These are the numbers you’ll enter into the calculator.
Notice the distribution. Is all your money in one bucket? That’s common, but it’s worth knowing. It might influence whether you do Roth conversions before retirement, or how you sequence your withdrawals later.
In Part 6, we’ll look at the other side of the equation: the income you can count on. Social Security, pensions, and other guaranteed sources that reduce what your portfolio needs to cover.
Next: Part 6 — Income You Can Count On
