On the path to financial freedom, how you store your money matters just as much as how you earn it. The U.S. tax system categorizes your savings into three distinct “buckets”—each with its own tax treatment. Understanding these buckets helps you build a flexible, tax-efficient retirement strategy. For NRIs, this framework is especially useful when coordinating U.S. accounts with global assets.
The Three Tax Buckets
Every dollar you earn or invest typically lands in one of three categories:
1. Taxable Bucket
This includes accounts where earnings are taxed annually. Examples:
- Checking and savings accounts
- Brokerage accounts holding stocks, ETFs, or mutual funds
Pros: Immediate access and liquidity
Cons: Interest, dividends, and capital gains are taxed each year
2. Tax Deferred Bucket
These are accounts where taxes are postponed until withdrawal. Examples:
- Traditional IRA
- 401(k)
- SEP IRA
Pros: Contributions may reduce current taxable income; growth is tax-deferred
Cons: Withdrawals are taxed as ordinary income; subject to Required Minimum Distributions (RMDs) starting at age 73
3. Tax Free Bucket
This is the most coveted bucket for long-term planning. Examples:
- Roth IRA
- Roth 401(k)
- Certain cash value life insurance strategies
Pros: Tax-free growth and tax-free qualified withdrawals
Cons: Contributions are made with after-tax dollars; income limits may restrict direct access
For NRIs, Roth accounts offer clean U.S. tax treatment and can simplify estate planning across borders.
Why Buckets Matter
If all your assets are concentrated in the tax deferred bucket, you may face a steep tax bill in retirement. A balanced approach across all three buckets allows you to:
- Control taxable income year by year
- Optimize Roth conversions during low-income windows
- Manage Medicare premiums and Social Security taxation
- Preserve flexibility for cross-border withdrawals and repatriation
This structure gives you options—especially valuable when tax laws or income needs shift.
The Next Chapter: Unlocking the Roth and Mega Backdoor
Now that you understand the buckets, the next step is learning how to fill the tax free bucket strategically. We’ll explore Roth IRAs, Roth conversions, and the Mega Backdoor Roth—powerful tools that can accelerate your climb toward financial freedom.