Tax
Tax-deferred, tax-free and taxable
Retirement money sits in one of three tax treatments: taxable accounts taxed as they grow, tax-deferred accounts taxed when withdrawn, and tax-free accounts such as Roth taxed neither way.
Also called account types · tax buckets · three buckets
Taxable accounts are ordinary brokerage and bank accounts: you are taxed on interest, dividends and realized gains along the way, and generally receive favorable treatment on long-held gains and a step-up in basis at death.
Tax-deferred accounts (traditional 401(k)s, traditional IRAs, most rollovers) gave you a deduction going in and tax every dollar coming out as ordinary income. The balance on the statement therefore overstates what is yours.
Tax-free accounts, principally Roth, were funded with money already taxed, grow without tax and come out without tax. Which of the three each dollar should sit in, and in which order the three should be spent, is most of what retirement tax planning consists of.
What it does not do
The three are not interchangeable and the balances are not comparable. A dollar in a traditional IRA is worth meaningfully less than a dollar in a Roth, and treating a combined net worth figure as if it were spendable is the most common arithmetic error in retirement planning.
This entry is a general explanation, not advice for your situation, and it deliberately avoids thresholds and figures, because those are the part most likely to be out of date. Reviewed August 27, 2026. If a decision turns on any of it, ring the office rather than relying on a page.
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