For many of us, our adult lives are spent saving money for retirement. In fact, several of my clients have recently shared with me their “number”—how much money they need to save in order to feel confident that they will not run out of money at some point. That number can vary quite a bit for different people; after all, some folks have a pension coming to them in retirement, or maybe a nice inheritance.

What most people never consider is the form their retirement money take. Think of your retirement savings as being stored in three different “buckets”–pre-tax, post-tax, and Roth.

Pre-tax dollars are savings you haven’t paid taxes on yet. These dollars are commonly saved in retirement accounts like 401(k)s and Individual Retirement Accounts (IRAs). Post-tax dollars are dollars that you paid taxes on and then saved and hopefully invested. A typical example would be someone who gets their weekly paycheck from work (after-tax) and then deposits $100 of that into an investment account. Roth dollars are income that you pay taxes on and then deposit into a Roth IRA account.

In an ideal world, you will have all three types of accounts when you retire. That allows you to optimize your tax situation by choosing which dollars to use under the varying circumstances that you will experience during retirement.

For example, appreciated shares of stock can generally be donated to charity, and the donor does not have to pay taxes on the capital gains from the appreciated stock. Instead, they enjoy a tax deduction based on the price of the stock at the time of the donation. You can see how that might be an appealing option for some of the stock in your post-tax investment account, if you have one.

A critical difference between the three types of dollars mentioned above is the tax treatment of each. Since no taxes are paid on the dollars in an IRA or 401(k), when you withdraw money from those types of accounts you are taxed on every dollar as if it is income.

On the other hand, money that you withdraw from a Roth IRA is not counted as income and is not taxed, since you paid taxes on it already. And your post-tax bucket is treated differently from either of those other types of accounts, since you are only taxed on the amount of gains, and often at a lower tax rate.

Those different tax treatments mean that you can control the amount of income that you report to the IRS each year. With good planning, you control your tax bracket, the cost of your Medicare, and potentially a few other financially critical pieces. That kind of flexibility can make a meaningful difference over time.

If you’re wondering how much of your savings should go into each of these three types of account, there’s no magical number that works for everyone. It depends on your needs and your situation, so what is most efficient for you will look different from what’s best for your

neighbor. Whatever mix of accounts you use, though, plan thoughtfully—because how you withdraw in retirement can matter just as much as how you saved.

However you choose to handle your retirement dollars, invest smart and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Returns are not guaranteed and past performance does not guarantee future results. Consult your financial advisor before purchasing any security.