The Importance of Saving Outside Your Retirement Plan

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When planning for retirement, many prioritize maxing out their 401(k) or IRA. These accounts offer tax advantages and often an employer match, making them a cornerstone of retirement savings. However, an often-overlooked aspect of financial planning is the value of diversifying the types of accounts you save into. At Vaultis Private Wealth, we frequently encounter clients with substantial 401(k) or IRA balances but limited savings elsewhere. This can restrict their ability to craft a tax-efficient Lifestyle Distribution Strategy in retirement. By spreading savings across taxable brokerage accounts, Roth IRAs, and traditional retirement plans, you gain flexibility to minimize taxes and optimize your retirement income.

The Power of 401(k) Savings

Saving through a 401(k) is straightforward. You choose a percentage of your paycheck to contribute, up to $23,500 in 2025 (or $31,000 if you’re 50 or older, or $34,750 if you’re aged 60 to 63, thanks to the SECURE 2.0 Act’s higher catch-up contribution rules), and deductions happen automatically. Many employers offer a match, boosting your savings effortlessly. This consistent, behind-the-scenes approach allows individuals to build significant retirement nest eggs over time. However, relying solely on a 401(k) can limit your options when transitioning from earning a paycheck to funding your retirement lifestyle.

Why Diversify Account Types?

Diversifying account types creates options to minimize taxes and optimize your Lifestyle Distribution Strategy in retirement. Each account type has unique tax implications and access rules, which can be combined strategically to meet your cash flow needs. Consider these key accounts and their roles in a diversified plan:

  • Traditional 401(k)s and IRAs
    Distributions from these accounts are taxed as ordinary income, with marginal 2025 rates for married couples filing jointly ranging from 10% to 37% (for example, 22% for income between $96,951 and $206,700, or 24% for income between $206,701 and $394,600, with the top 37% rate applying to incomes over $751,600). Additionally, Required Minimum Distributions (RMDs) begin at age 73, requiring withdrawals of approximately 4% of your account balance annually, based on the prior year’s December 31 value. These withdrawals can push you into higher tax brackets, particularly if RMDs exceed your spending needs.

  • Taxable Accounts
    Taxable accounts provide unparalleled flexibility, with no age restrictions on accessing funds. You pay taxes annually on dividends, interest, and realized capital gains, but these are often taxed at preferential rates: qualified dividends and long-term capital gains face 0%, 15%, or 20% rates, depending on your income (for example, 15% for married couples with taxable income between $96,951 and $583,750 in 2025). You can also access your principal (basis) tax-free. For instance, to generate $40,000 from a taxable account, you might have $10,000 in dividends taxed at 15% and sell investments for $30,000 with a $20,000 basis, resulting in only $10,000 of taxable long-term capital gains.

  • Roth IRAs
    Roth IRAs stand out for their tax-free growth and distributions, provided you meet two conditions: you’re at least 59½, and the account has been open for five years. Unlike taxable accounts, you avoid annual taxes on earnings, and unlike traditional IRAs, there are no RMDs. Contributions in 2025 are limited to $7,000 (or $8,000 if 50 or older), subject to income limits. Because Roth IRAs grow tax-free, it’s often strategic to preserve these funds for later in retirement or for years when your tax bracket is high, using them to supplement income without increasing taxable income.

Crafting a Tax-Efficient Lifestyle Distribution Strategy

In retirement, your focus shifts from saving to generating income to support your lifestyle. A Lifestyle Distribution Strategy involves combining income sources, such as Social Security, pensions, rental income, or part-time work, with withdrawals from your investment accounts. The goal is to meet your cash flow needs tax-efficiently while minimizing your overall tax burden.

To illustrate the power of diversification of account types, consider a common retirement scenario. Imagine you need $100,000 to supplement your Social Security and pension income. If you withdraw this entirely from a 401(k) or IRA, the full amount is taxed as ordinary income, potentially pushing you into a higher tax bracket, such as 22% or 24%. Now consider a diversified approach: $40,000 from an IRA (taxed as ordinary income), $40,000 from a taxable account (with, say, $10,000 in dividends and $10,000 in capital gains taxed at preferential rates, typically 15%), and $20,000 tax-free from a Roth IRA. This strategy reduces your taxable income by blending income sources with different tax treatments, keeping you in a lower bracket and minimizing your overall tax burden compared to the IRA-only approach. This flexibility becomes even more critical when considering mandatory withdrawals.

RMDs add another layer of complexity. If your 401(k) or IRA is your only significant account, large RMDs could force withdrawals beyond your needs, reducing your ability to control your tax bracket. A diversified portfolio allows you to draw from taxable accounts or Roth IRAs in years when RMDs inflate your income, preserving tax efficiency.

Building a Diversified Savings Plan

To achieve flexibility in retirement, diversify your savings now. Continue contributing to your 401(k) to capture any employer match, up to the $24,000 limit (or $32,000 if 50+). Also prioritize:

  • Taxable accounts for their accessibility and favorable tax treatment on capital gains and dividends.

  • Roth IRAs for tax-free growth, through direct contributions ($7,000 or $8,000 if 50+) or Roth conversions from traditional IRAs, strategically timed with your advisor to manage tax implications.

By diversifying your savings, you create a robust framework for retirement. You’ll have the flexibility to navigate tax brackets, RMDs, and unexpected expenses while optimizing your income. At Vaultis Private Wealth, we view retirement planning as a strategic process of aligning your unique mix of assets with your lifestyle goals. Spreading savings across account types isn’t just about saving more—it’s about saving smarter to minimize taxes and maximize your retirement freedom.



Disclaimer

This article is provided for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security or financial product. The information presented is general in nature and does not take into account your specific financial situation, objectives, or needs. Past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal. Tax laws and regulations are subject to change and may vary based on individual circumstances. Please consult a qualified financial advisor or tax professional before making any investment or financial planning decisions. Vaultis Private Wealth is not responsible for any actions taken based on the information in this article.