Your 401(k) isn’t enough. How to find an ideal mix of Roth, traditional, taxable accounts in retirement (and why a blend could save you $100K or more)

The default assumption is that the 401(k) should be maxed out for maximum tax efficiency, but the reality is more nuanced. In practice, you may benefit from allocating your savings across a mix of traditional tax-advantaged and ordinary brokerage accounts to improve tax flexibility, according to U.S. Bank. (1)

Here’s why an appropriate mix of accounts can help you save money and preserve financial flexibility in retirement.

Understanding all the tools available

The government offers tax incentives to encourage savings, but each account comes with different rules, limitations, and advantages.

The first step for investors is to learn about the different retirement and investment accounts available and how they are structured.

Traditional accounts like 401(k) plans and traditional IRAs offer an upfront tax deduction but create a tax liability when funds are withdrawn at retirement. Roth accounts work the opposite way: You pay taxes upfront before contributing and then enjoy tax-free withdrawals later if requirements are met.

The Health Savings Account (HSA) is often described as having a “triple tax advantage”:

• tax-deductible contributions
• tax-free growth
• and tax-free withdrawals for qualified medical expenses.

After age 65, withdrawals for non-medical expenses are taxed as ordinary income, similar to a traditional IRA, but without the early-withdrawal penalty.

The final, and perhaps most overlooked, piece is the brokerage account. These accounts generally offer no special tax advantages for contributions, growth, or withdrawals. But in exchange for this lack of tax preference, they provide significant flexibility: no age limits, no penalties, and no required minimum distributions (RMDs).

It’s wise not to overemphasize any one of these tools. Too much money concentrated in your 401(k) may increase the likelihood of large RMDs in retirement. Too much in Roth accounts could mean paying more taxes upfront than necessary. Meanwhile, a large HSA balance could eventually be used for non-medical expenses that are taxed as ordinary income.

Building the ideal mix

The right mix for you depends on your financial goals and timeline, but also on your expected income and tax bracket over time.

Tax diversification often becomes more valuable as you accumulate capital. If you’re a multimillionaire, for instance, there’s a good chance you’ve maxed out your tax-advantaged accounts and may face a higher future tax burden or large required withdrawals.

To optimize your strategy, Ameriprise Financial suggests starting early and implementing long-term plans while you’re still actively building wealth. (2)

Divide your planning timeline into three categories: working years, pre-retirement, and retirement. During your working years, your focus should often be on tax-deferral through 401(k) and HSA accounts, but it can also be beneficial to contribute to Roth accounts when possible. Use Roth contributions as part of long-term tax planning during your working years.

In the years leading up to retirement, or pre-retirement, you may consider strategies like Roth conversions to minimize future RMDs later.

You could use net unrealized appreciation (NUA) rules to convert some employer stock assets in your 401(k) so a portion may be taxed at capital gains rates rather than ordinary income. But given the complexity of this strategy and the rules around it, you should speak with a financial advisor first. (3)

If you’ve diversified your assets well, you have greater flexibility to control withdrawals from different accounts during retirement. This control can potentially reduce your overall tax burden.

Assume a retiree has $1.5 million and needs $40,000 per year from savings (on top of Social Security benefits).

Scenario 1: All Traditional 401(k)

Every dollar withdrawn is taxed as ordinary income. At an assumed 22% effective rate, that’s about $8,800 in annual tax. Over 30 years, that’s roughly $264,000 in taxes.