3 Bucket Strategy The Money Guys

The 3 Bucket Strategy The Money Guys is a tax-smart retirement planning method that divides your savings into three categories: tax-deferred, tax-free, and after-tax (taxable). This approach creates flexibility, reduces tax risk, and ensures you’ll always have options for income in retirement. In this guide, we’ll cover what the three buckets are, how The Money Guys recommend funding them, real-world examples, common mistakes, and how you can apply this to your own retirement plan. Plus, we’ll share fun facts and statistics that highlight why bucket planning really matters!

Who Are The Money Guys?

The Money Guys, Brian Preston and Bo Hanson, are financial advisors who created the popular Money Guy Show. They’re known for making complicated financial strategies easy and approachable. Their philosophy is built on the Financial Order of Operations, a step-by-step process to prioritize savings and investing. They stress not just saving, but saving smart with tax efficiency, which is exactly what the three bucket strategy delivers. By spreading money across different tax categories, you create freedom in retirement—no matter what Congress or the IRS decides about future tax rates.

What Is the 3 Bucket Strategy?

The 3 bucket strategy divides your retirement savings into three groups, each with its own tax treatment. Think of it like having three different faucets you can turn on in retirement to control how much tax you pay:

1. Tax-Deferred Bucket

These are accounts like 401(k)s, Traditional IRAs, 403(b)s, and pensions. Contributions are made pre-tax, which lowers your taxable income today. The money grows tax-deferred, but when you take it out in retirement, it’s taxed as ordinary income. According to Vanguard, 60% of U.S. retirement assets are in these types of accounts—making them the largest bucket for most people.

2. Tax-Free Bucket

This includes Roth IRAs, Roth 401(k)s, and Health Savings Accounts (HSAs). Contributions are made with after-tax dollars, but the growth and withdrawals are completely tax-free. This is like owning a golden goose that lays tax-free eggs. Roth accounts also aren’t subject to required minimum distributions (RMDs), giving retirees more control. Studies from Fidelity show that younger savers benefit the most from Roth contributions, since their tax rate is often lower now than it will be later.

3. Taxable (After-Tax) Bucket

These are regular brokerage accounts and other investments outside of retirement accounts. Earnings are taxed annually through dividends and capital gains, but the advantage is total flexibility. You can withdraw money anytime without penalties, which makes this bucket crucial for people who plan to retire early or need funds before age 59½. For example, if you want to retire at 55, your taxable bucket is your bridge until traditional retirement accounts can be accessed.

Why the 3 Bucket Strategy Matters

Why not just dump everything into your 401(k)? Because tax laws change, your income fluctuates, and no one can predict what tax rates will be 10, 20, or 30 years from now. By diversifying across buckets, you hedge against future tax hikes and give yourself flexibility. For example, if you find yourself in a higher tax bracket in retirement, you can lean on Roth withdrawals to avoid a big tax bill. If you’re in a low bracket, you might purposely withdraw from tax-deferred accounts to “fill up” your bracket at lower rates.

Contribution Order: The Money Guys’ Financial Order of Operations

The Money Guys suggest a specific sequence when funding your buckets. Here’s the order:

1. Grab your employer match in a 401(k) (free money).
2. Max out an HSA if eligible—triple tax advantage!
3. Fund your Roth IRA (or backdoor Roth).
4. Contribute more to your pre-tax retirement account.
5. Invest in a taxable brokerage account.

This system ensures you’re balancing tax benefits while building all three buckets over time. To see how these priorities affect your income plan, try our Retirementize online income calculator.

Roth vs. Traditional: Which Should You Choose?

The Money Guys use a simple rule of thumb:

• If your combined marginal tax rate is under 25% → choose Roth.
• If it’s over 30% → choose Traditional.
• If you’re in the 25–30% range → it depends on age and income trajectory.

Example: A 25-year-old earning $50,000 probably benefits from Roth contributions, since their current tax rate is low. A 45-year-old making $150,000 may lean Traditional to lower taxable income today. A 60-year-old nearing retirement may want a mix, especially if they expect high medical costs that could offset future taxable income.

Real-World Allocation Examples

The Money Guys often suggest aiming for an even split across the three buckets (33/33/33). However, Brian Preston has mentioned he prefers a Roth-heavy allocation (80% Roth, 20% taxable). Meanwhile, some Reddit users in the Money Guy community shared their own ratios, like 75% pre-tax, 20% Roth, and 5% taxable. This shows there’s no perfect formula—the “right” mix depends on your personal situation.

Withdrawal Strategy in Retirement

How do you spend from these buckets once retired? A common strategy is:

• Start with taxable accounts (to minimize capital gains and keep retirement accounts growing).
• Use Roth accounts for tax-free income when needed.
• Draw from tax-deferred accounts last—though RMDs eventually require withdrawals.

This method can help keep you in lower tax brackets longer, extend Roth tax-free growth, and strategically reduce lifetime taxes. Our retirement withdrawal calculator can model the effect of different strategies on your nest egg.

Pros and Cons of the 3 Bucket Strategy

Pros

• Tax diversification
• Flexibility in retirement income
• Ability to adapt to tax law changes

Cons

• Requires planning and discipline
• More complex than a single-bucket approach
• May take decades to balance all three

Common Mistakes to Avoid

• Ignoring Roth contributions early in your career
• Overloading tax-deferred accounts while neglecting taxable flexibility
• Forgetting about HSAs as stealth retirement accounts
• Failing to plan for RMDs

How to Apply the 3 Bucket Strategy to Your Own Plan

Here’s a simple checklist:

1. Evaluate your current account balances—what percentage sits in each bucket?
2. Compare your current vs. future expected tax brackets.
3. Prioritize Roth contributions if you’re young and in a low bracket.
4. Build taxable brokerage accounts for flexibility and early retirement.
5. Use tools like the Retirementize calculator to model outcomes.

Conclusion

The 3 bucket strategy The Money Guys recommend isn’t about picking the “best” account—it’s about creating balance and flexibility. By spreading your retirement savings across tax-deferred, tax-free, and taxable accounts, you protect yourself from tax uncertainty, gain more control over your retirement income, and set yourself up for a more confident future. Whether you’re just starting out or nearing retirement, the three buckets can guide your next savings decision.

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