Tax Diversification Strategies for Pre-Retirees: Cut Taxes and Maximize Income After 50

Approaching retirement? You probably have visions of traveling more, spoiling the grandkids, or finally tackling that hobby you’ve been putting off. But here’s the surprise: your biggest retirement expense isn’t likely to be airfare or even healthcare—it’s taxes. For many people, taxes quietly take the largest bite out of their retirement income, year after year.

That’s where tax diversification comes in. Think of it like financial flexibility insurance. Just as you wouldn’t put all your investments into a single stock, you don’t want all your retirement savings sitting in just one type of account. Tax diversification means spreading your savings across different “buckets” with their own tax rules—some accounts where withdrawals are taxed later, some where they’re tax-free, and others that offer more flexibility along the way.

And if you’re between the ages of 45 and 65, this is the perfect time to pay attention. Why? Because you’re likely in your peak earning years, which means bigger contributions and bigger opportunities to make smart moves. You’re also closing in on retirement, which means you have less time to adjust if you’ve been leaning too heavily on just one kind of account. The good news? You still have a window to create the balance you’ll need.

Over the rest of this article, I’ll walk you through why tax diversification matters, the different types of accounts that make it possible, and the strategies that can help you keep more of your hard-earned money in your pocket—not Uncle Sam’s. By the end, you’ll have a clearer idea of how to structure your savings so that when retirement comes, you’ll be the one in control of how much tax you pay, and when.

What Is Tax Diversification and Why It Matters Before Retirement

When most people think about retirement planning, they focus on how much they’re saving and what they’re investing in. That’s important, of course, but there’s another layer that doesn’t get nearly enough attention: how your money will be taxed when you finally use it.

That’s the heart of tax diversification. It simply means not putting all your retirement savings into one type of account. Instead, you spread your money across different “tax buckets,” so you’ll have options later.

Here’s a quick breakdown of the three main buckets:

1. Tax-deferred accounts – These are your Traditional IRAs, 401(k)s, and similar accounts. You don’t pay taxes when you put the money in, but every dollar you take out in retirement is taxed as ordinary income. Think of it as “pay later.”

2. Tax-free accounts – Roth IRAs and Roth 401(k)s fall into this group. You pay taxes upfront when you contribute, but then your withdrawals in retirement are completely tax-free. This is your “pay now, enjoy later” bucket.

3. Taxable accounts – Regular brokerage accounts, savings accounts, and CDs fit here. You don’t get tax breaks for contributing, but they offer flexibility, and gains can often be taxed at lower capital gains rates instead of income tax rates.

Why does this matter so much as you approach retirement? Because tax laws change. Tax brackets shift. And nobody has a crystal ball that tells us what rates will look like 10 or 20 years from now. If all of your money is stuck in one type of account, you’re at the mercy of whatever tax rules happen to be in place when you need it.

But with tax diversification, you gain control. You can choose where to pull money from each year, depending on your tax bracket and your income needs. That means you can smooth out your taxes, avoid nasty surprises, and potentially keep thousands more dollars working for you instead of being sent off to the IRS.

In short: retirement isn’t just about how much you save—it’s also about how you save. And if you’re in your 50s or early 60s, you still have time to set up the right mix.

Why Ages 45–65 Are the Sweet Spot for Tax Diversification

If you’re between 45 and 65, you’re sitting in what I like to call the “sweet spot” for tax planning. You’re close enough to retirement that it’s starting to feel real, but you still have time to make meaningful changes. This window is incredibly valuable, especially when it comes to tax diversification.

Here’s why this stage of life matters so much:

1. You’re in your peak earning years.

For many people, these are the highest-earning years of their career. That means you have the ability to save more—and where you put those savings matters. Choosing whether to add to a traditional 401(k), a Roth option, or even a taxable account can make a huge difference in how much you’ll owe in retirement.

2. Catch-up contributions give you an extra boost.

Once you hit age 50, the IRS lets you put more money into retirement accounts each year. This is like bonus savings power. If you direct those catch-up contributions strategically—say, into a Roth or a different bucket—you can quickly improve your tax diversification.

3. You have time to use Roth conversions wisely.

Between the time you retire and when required minimum distributions (RMDs) kick in at age 73, you may have a few “low-tax years.” That’s prime time to shift money from tax-deferred accounts into a Roth, where it can grow tax-free. But you can’t do this overnight—it takes planning, and your late 40s through early 60s are the years to map it out.

4. There’s still room for growth.

Even if you’re in your 50s, money you put into a Roth account today could still have 20 or 30 years to grow tax-free. Think about that—by acting now, you’re not just planning for retirement income, you’re planning for your 70s, 80s, and even what you might leave behind for family.

5. Flexibility beats uncertainty.

Let’s face it: tax rates are unpredictable. They’ve changed many times before, and they’ll almost certainly change again. If all your savings are in one tax bucket, you’re stuck with whatever Congress decides. But if you diversify now, you’ll have the flexibility to adapt no matter what the future brings.

So if you’re in this age range, consider this your call to action. The clock is ticking, but the game isn’t over—you still have plenty of moves left to make. And the sooner you start balancing your tax buckets, the more options you’ll have when you finally step into retirement.

Tax Buckets in Detail

Now that we’ve talked about why tax diversification matters, let’s dig into the three main “buckets” your retirement savings can sit in. Each one has its own rules, advantages, and drawbacks. The trick isn’t picking just one—it’s knowing how to use them together.

1. Tax-Deferred Accounts: Pay Taxes Later

These are your Traditional IRAs, 401(k)s, 403(b)s, and similar accounts. You don’t pay taxes when you put the money in, and your investments grow tax-deferred. That’s the good part. The catch? Every dollar you withdraw in retirement is taxed as ordinary income—just like your paycheck is today.

Pros:

• Big upfront tax break while you’re working (especially useful in high-earning years).

• Your money grows without annual tax bills.

• Contribution limits are high, especially with catch-up contributions after 50.

Cons:

• You’ll pay income tax on withdrawals, no matter how long you’ve invested.

• Required minimum distributions (RMDs) start at age 73, even if you don’t need the money.

• Large balances can push you into a higher tax bracket in retirement.

Think of this bucket as the “pay later” option. It’s useful, but too much in here can create a tax headache down the road.

2. Tax-Free Accounts: Pay Taxes Now, Enjoy Later

This is the Roth side of the world—Roth IRAs and Roth 401(k)s. You pay taxes upfront on your contributions, but then your investments grow tax-free, and withdrawals in retirement are completely tax-free as well (as long as you follow the rules).

Pros:

• Withdrawals are tax-free in retirement.

• No RMDs for Roth IRAs (though Roth 401(k)s have them unless rolled over).

• Fantastic for leaving money to heirs—tax-free growth can continue for years.

Cons:

• You don’t get a tax break when you contribute.

• Income limits may restrict your ability to contribute directly to a Roth IRA (though workarounds exist).

• Contributing can feel painful in high-earning years because you’re paying taxes now.

This is your “pay now, enjoy later” bucket. It’s especially powerful if you expect tax rates to rise or if you’re planning for a long retirement.

3. Taxable Accounts: Flexible, But Not Always Efficient

Taxable accounts include your regular brokerage account, savings accounts, and CDs. There’s no upfront tax break, and you’ll pay taxes on dividends, interest, and realized capital gains along the way. But the flexibility they offer can be worth it.

Pros:

• No age restrictions on withdrawals—useful before you hit retirement age.

• Capital gains are often taxed at lower rates than ordinary income.

• Unlimited contributions (no IRS cap).

Cons:

• You’ll get a tax bill on income and gains along the way.

• Requires discipline, since the money is accessible anytime.

Think of this as your “always available” bucket. It’s not as tax-efficient as the others, but it gives you the freedom to cover unexpected expenses or bridge the gap if you retire before 59½.

When you look at all three together, you can see why balance matters. If you put everything in tax-deferred accounts, you’re signing up for big tax bills later. If you rely only on Roths, you may miss the benefit of upfront deductions when you’re earning the most. And if you ignore taxable accounts, you’re missing out on flexibility.

The goal isn’t perfection—it’s having a mix that gives you choices. Because the more choices you have in retirement, the more control you’ll have over your tax bill.

Building a Tax-Diversified Portfolio in Your 50s and Early 60s

By the time you hit your 50s or early 60s, you’re likely looking at retirement as something that’s not just on the horizon—it’s coming up fast. This is when tax diversification moves from a “nice idea” to a must-have strategy. The good news? You still have time to make meaningful changes.

Here’s how to start balancing your buckets.

Step 1: Max out your employer match first.

If you’re still working and your employer offers a 401(k) match, that’s free money. Always grab it. Whether you choose traditional or Roth contributions depends on your current tax bracket and long-term plan, but don’t leave that match on the table.

Step 2: Split contributions between tax-deferred and Roth, if possible.

Many employers now offer both traditional and Roth 401(k) options. If your plan allows it, consider splitting your contributions. For example, you might direct 60% to traditional (for the tax break today) and 40% to Roth (for tax-free income later). This way, you’re building balance now instead of playing catch-up later.

Step 3: Don’t forget taxable accounts.

It’s easy to overlook your regular brokerage account when you’re laser-focused on retirement accounts. But taxable accounts give you the flexibility to access funds without penalties before 59½. They’re also useful for things like early retirement or helping family with major expenses. Think of this as your “safety valve.”

Step 4: Use catch-up contributions wisely.

Once you hit 50, the IRS lets you put extra money into retirement accounts each year. For 401(k)s, that’s an additional $7,500 (on top of the standard limit). For IRAs, it’s an extra $1,000. Where should you put those catch-up dollars? It depends on your situation, but directing at least some of them into a Roth bucket can give you powerful long-term tax-free growth.

Step 5: Rebalance annually.

Just like you rebalance your investments, you should also check your tax diversification each year. If all your savings are skewed heavily toward tax-deferred accounts, start shifting new contributions elsewhere.

A Real-World Example

Let’s look at two couples:

• Couple A saves almost everything in their traditional 401(k)s. By the time they retire, they have a large nest egg, but every withdrawal is taxed as income. Once RMDs start at 73, their tax bill jumps higher than they expected.

• Couple B splits savings across a traditional 401(k), a Roth IRA, and a taxable brokerage account. In retirement, they can pull just enough from each bucket to stay in a lower tax bracket. They keep more flexibility, more control, and more money in their pockets.

Both couples saved diligently, but only one had the balance that let them choose how to manage their taxes in retirement.

In your 50s and early 60s, you have the unique opportunity to fine-tune your retirement savings mix. This isn’t about overhauling everything you’ve done—it’s about making smart, intentional choices now so that you’ll have options later.

Withdrawal Strategies for Retirees

Saving for retirement is one thing. Spending that money wisely—without giving too much of it to the IRS—is another. This is where tax diversification really shines. Having money in different buckets gives you the ability to pull from the right source at the right time.

Let’s look at how to turn your savings into income strategically.

1. Sequencing Withdrawals: Which Bucket Comes First?

A common rule of thumb is to start with taxable accounts first, then move to tax-deferred, and save Roth accounts for last. Why?

• Taxable accounts often have lower capital gains tax rates.

• Using them first allows your tax-deferred accounts (like 401(k)s and IRAs) more time to grow.

• Keeping Roth accounts untouched as long as possible lets tax-free growth compound.

But remember: rules of thumb are starting points, not one-size-fits-all solutions. The “best” sequence depends on your income, expenses, and tax bracket each year.

2. Blending Withdrawals to Stay in Lower Brackets

Sometimes, the smartest move isn’t pulling from just one bucket—it’s mixing. For example, you might take some income from a tax-deferred account and fill in the rest with Roth withdrawals. This way, you stay below a certain tax bracket instead of getting pushed into a higher one.

Think of it like cooking: you don’t want too much spice (taxable income) in the dish. By blending your withdrawals, you get the flavor just right.

3. Managing Required Minimum Distributions (RMDs)

Starting at age 73, the IRS requires you to take money out of your tax-deferred accounts each year. For many retirees, this creates a sudden spike in taxable income.

Tax diversification can soften the blow. By leaning on taxable and Roth accounts earlier, you can keep your tax-deferred balances smaller, which means lower RMDs later. And if you’ve converted some funds into Roth accounts before RMD age, you’ll have even more flexibility.

4. Social Security and Medicare Considerations

Withdrawals don’t just affect your tax bill—they can also impact how much of your Social Security is taxed and whether you’ll pay higher Medicare premiums.

• Pulling too much from tax-deferred accounts in one year could make up to 85% of your Social Security benefits taxable.

• Higher income could also push you into Medicare’s income-related monthly adjustment (IRMAA), which means higher premiums.

Having money in Roth accounts is especially helpful here since withdrawals don’t count toward those income thresholds.

5. A Practical Example

Imagine you need $70,000 for living expenses this year. If you pull it all from your 401(k), it’s taxed as ordinary income, and you could easily bump into a higher bracket. Instead, you take $40,000 from your 401(k), $20,000 from your Roth IRA, and $10,000 from your taxable account. By spreading withdrawals across buckets, you keep your taxable income lower and your tax bill smaller.

The point here is that in retirement, income planning isn’t just about making sure you have enough—it’s about making sure you’re taking it from the right places. With a diversified mix of accounts, you can design a withdrawal strategy that works for your lifestyle and your tax bill.

Advanced Tax Moves for Pre-Retirees

Once you’ve built a solid mix of tax-deferred, tax-free, and taxable accounts, the next step is learning how to fine-tune your strategy. If you’re in your 50s or early 60s, there are some powerful moves you can make now to set yourself up for a smoother, more tax-efficient retirement.

1. Roth Conversions: Shifting Money from “Pay Later” to “Pay Never”

A Roth conversion is when you take money from a tax-deferred account (like a traditional IRA) and move it into a Roth account. You’ll pay taxes on the amount you convert that year, but then it grows tax-free forever—and there are no RMDs on Roth IRAs.

Why it’s powerful for pre-retirees:

• If you retire before age 73, you may have several “low-income years” before RMDs and Social Security kick in. That’s the perfect window to do conversions at lower tax rates.

• You’re essentially pre-paying taxes on your terms, not the IRS’s.

• You’re giving yourself more tax-free income down the road—and possibly reducing your future RMDs.

It takes planning, though. Convert too much in one year, and you might push yourself into a higher tax bracket or trigger higher Medicare premiums. Converting in chunks over time is often the smarter play.

2. Using Taxable Accounts to Fund Conversions

Here’s a pro tip: if you’re doing Roth conversions, use money from a taxable account to pay the tax bill instead of dipping into the retirement account you’re converting. This way, you move the full amount into the Roth and let it grow tax-free, rather than shrinking the balance from the start.

3. Qualified Charitable Distributions (QCDs)

If giving to charity is part of your plan, QCDs can be a tax-efficient way to do it. Starting at age 70½, you can give up to $100,000 per year directly from your IRA to a qualified charity. The gift counts toward your RMD but doesn’t show up as taxable income.

That’s a win-win: you support causes you care about, reduce your RMD, and lower your taxable income at the same time.

4. Legacy Planning: Thinking About What You’ll Leave Behind

Tax diversification isn’t just about your retirement—it’s also about what happens when you’re gone.

• Roth accounts are especially powerful for heirs, since withdrawals are tax-free.

• In contrast, inherited traditional IRAs require beneficiaries to withdraw the full balance within 10 years—and those withdrawals are taxed as ordinary income. That can create an unexpected tax burden for your kids.

By converting some funds to Roth during your lifetime, you can make things easier (and more tax-friendly) for the next generation.

5. Timing Is Everything

These advanced moves work best when they’re part of a bigger plan. For example:

• Retiring at 62? You might delay Social Security until 67 or 70, giving you several prime years to do Roth conversions.

• Planning a large charitable gift? You might coordinate that with an RMD year to maximize the benefit.

The key is to think a few steps ahead. Taxes aren’t just about this year—they’re about the entire arc of your retirement.

When you combine smart withdrawals with strategies like Roth conversions, QCDs, and legacy planning, you’re not just avoiding taxes—you’re actively shaping your financial future. It’s like moving from playing defense to playing offense.

Mistakes Pre-Retirees Make with Tax Diversification

Even the savviest savers sometimes trip up when it comes to taxes. The truth is, most retirement mistakes aren’t about saving too little—they’re about saving in the wrong way. Here are some of the most common missteps I see pre-retirees make, and more importantly, how to avoid them.

1. Saving Everything in Tax-Deferred Accounts

It’s easy to default to your company 401(k) or a traditional IRA because that’s where the big tax break shows up. But if all your money ends up here, retirement can turn into one long tax bill. Every withdrawal is taxed as ordinary income, and once RMDs start, you could be forced to take out more than you actually need—pushing you into a higher bracket.

How to avoid it: Start mixing in Roth and taxable savings now, even if it means giving up some upfront deductions. Future-you will thank present-you.

2. Ignoring Roth Options at Work

Many employers now offer Roth 401(k) contributions, but surprisingly few people take advantage of them. The Roth option can be especially valuable in your 50s and 60s, since you may have fewer years left to contribute and still plenty of time for tax-free growth.

How to avoid it: If your employer offers a Roth 401(k), consider splitting your contributions between traditional and Roth. It’s an easy way to diversify without opening a new account.

3. Forgetting About Taxable Accounts

Taxable accounts don’t get as much attention as IRAs and 401(k)s, but they play a big role in flexibility. They can help you retire early, fund large purchases without penalty, or even pay the tax bill for Roth conversions. Skipping them means fewer options.

How to avoid it: Keep at least some savings in a taxable brokerage account. Think of it as your “wild card” bucket.

4. Waiting Too Long to Rebalance

Some people don’t realize how skewed their savings are until it’s almost too late. If you’re 63 and 95% of your retirement savings are in tax-deferred accounts, your options are more limited than if you’d started balancing things out earlier.

How to avoid it: Check your tax diversification at least once a year, just like you check your investment mix. Adjust new contributions or explore conversions if things are out of balance.

5. Overlooking the Ripple Effects of Withdrawals

Taxes in retirement aren’t just about your income bracket. Withdrawals can affect how much of your Social Security is taxable and whether you’ll pay higher Medicare premiums. Many retirees are caught off guard by these “stealth taxes.”

How to avoid it: Work with your planner to coordinate withdrawals carefully. Sometimes pulling a little from Roth instead of tax-deferred can keep you under a critical threshold.

At the end of the day, most mistakes happen because people focus only on how much they’ve saved instead of where they’ve saved it. By avoiding these pitfalls, you’ll set yourself up with more control, fewer surprises, and a more tax-efficient retirement.

How to Get Started Now

At this point, you might be thinking, “Okay, I get it—tax diversification matters. But where do I start?” The good news is, you don’t have to overhaul everything overnight. Small, intentional steps now can lead to big benefits later. Here’s a simple roadmap to get moving.

Step 1: Take Inventory of Your Buckets

Start by looking at where your retirement savings are today. How much do you have in tax-deferred accounts (like your 401(k) or IRA)? What about in Roth accounts? And in taxable savings? This snapshot gives you a baseline.

Step 2: Spot the Gaps

If nearly all your money is in one type of account—usually tax-deferred—that’s a red flag. It doesn’t mean you’ve done something wrong, but it does mean you have work to do to balance things out.

Step 3: Adjust Contributions Going Forward

You can’t change where your past contributions went, but you can control what you do next. If you’re heavy on tax-deferred, start directing more contributions to Roth or taxable accounts. If you already have a good Roth balance, consider adding to taxable for flexibility.

Step 4: Explore Roth Conversions

If you’re in your 50s or early 60s, ask your planner whether Roth conversions make sense for you. Even small, gradual conversions can pay off in the long run by reducing your future tax bill and giving you more flexibility in retirement.

Step 5: Revisit Your Plan Each Year

Your income, expenses, and tax laws will change over time. So will your retirement timeline. That’s why it’s important to check in annually. Think of it like a tune-up for your retirement plan—you’re making sure everything is still running smoothly and adjusting before problems build up.

Step 6: Don’t Go It Alone

Tax diversification is simple in concept but tricky in execution. There are ripple effects—on your tax bracket, on Social Security, on Medicare premiums, and on your legacy plans. This is where working with a financial planner really pays off.

Bluntly put: the best time to start is now. The sooner you begin balancing your buckets, the more options you’ll have when you retire. And when it comes to taxes, options are everything.

In Conclusion: Transform Your Taxes into Tools

When most people picture retirement, they imagine freedom—time to travel, relax, and enjoy life on their own terms. What they don’t imagine is the IRS showing up every year with its hand out. But the truth is, taxes can be one of your biggest expenses in retirement if you don’t plan ahead.

That’s why tax diversification is so powerful. By spreading your savings across tax-deferred, tax-free, and taxable accounts, you give yourself flexibility. You get to decide when and how to take income, instead of being boxed into one option that may not fit your situation.

And if you’re between 45 and 65, the clock is ticking—but you still have time. These are your prime years to:

• Balance out your tax buckets with smarter contributions.

• Take advantage of catch-up contributions after 50.

• Explore Roth conversions before RMDs begin.

• Build in flexibility for Medicare, Social Security, and even your legacy plans.

Here’s the bottom line: you’ve worked hard to build your retirement savings. You deserve to enjoy them without unnecessary tax surprises. Tax diversification won’t eliminate taxes completely, but it can give you more control—and in retirement, control is everything.

So, what’s your next step? Take inventory of your savings buckets and talk with your financial planner about where to adjust. A little planning now can mean thousands saved later. And that’s money you can use for the things that really matter—travel, family, and the retirement you’ve been looking forward to.