When it comes to retirement savings, the first leg is social security, the second leg is retirement savings, and the final leg is your pension, if you’re one of the fortunate ones.

For our purpose here, let’s focus on the second leg of the three-legged stool, since that’s the only one you can manage. For the buckets of money concept, personal savings can take three basic forms: (1) employer-based retirement plans, (2) Roth IRAs, and (3) taxable investment accounts. Let’s drill down to examine the pros and cons of each.

1. Employer based-retirement plans include profit sharing plans, 401k plans, and others. Many people believe they should stuff all their retirement money inside the 401k bucket because it reduces your taxable income. However, that may increase your tax risk down the road. What do I mean by 'tax risk'? All the money you pull out in the future is taxed at regular tax rates. If tax rates are higher when you need the money, all those withdrawals will be subject to higher taxes. See the problem? As a retiree, you could be held hostage to the whims of the income tax system.

2. If eligible, save some of your money inside a Roth IRA, or even a Roth 401k, a recent development. Tax-free withdrawals down the road are the major benefit. Sure, you don’t get an upfront deduction, but with years of tax-free growth, it may be a better bet.

3. Finally, try to invest the third bucket into personally-owned mutual funds, stocks, bonds, etc. Those assets, when sold to provide income, are taxed only on the appreciation and at capital gains tax rates. The top capital gains tax rate is now 15% versus 35% for the highest regular income tax rate. Deposits are made with after-tax money, so no tax break is warranted on contributions.

Keep in mind that as a taxpayer, the rules keep changing on you. Finding the right balance between immediate income tax savings on your 401k contributions and lower tax rates in retirement is a tricky tight rope and may require some professional help. The point is that if you have three buckets of money to draw from in your golden years, you'll be better equipped to manage your tax burden in the future. After all, don’t be fooled into thinking that Uncle Sam isn’t tracking the enormous pool of retirement funds just waiting to be taxed. And the timing of increased tax rates might, just might, coincide with your planned retirement.