--- title: "How to Build a Tax-Diversified Retirement Portfolio" source: https://www.perissosprivatewealth.com/insights/tax-diversified-retirement-portfolio publisher: Perissos Private Wealth Management published: 2026-09-26T05:00:00+00:00 updated: 2026-09-26T05:00:04.891953+00:00 topics: tax-diversified retirement portfolio, retirement tax diversification, Roth conversion planning, traditional IRA vs Roth IRA withdrawals, taxable brokerage retirement income, Oklahoma retirement planning license: Educational content. Cite with attribution. Not personalized financial, tax, or legal advice. --- # How to Build a Tax-Diversified Retirement Portfolio ## Quick answer A tax-diversified retirement portfolio spreads savings across traditional, Roth, and taxable accounts so future withdrawals can be matched to different tax treatments. That flexibility may help manage ordinary income, capital gains, Medicare premium effects, and Social Security taxation, but the right mix depends on spending needs, current balances, and applicable federal rules. ## Key takeaways - For a Roth IRA, a qualified distribution generally requires a five-tax-year holding period plus age 59½ or another qualifying condition. - In the article’s example, a married couple age 67 raising $40,000 would recognize $40,000 of ordinary income from a pretax traditional IRA, $10,000 of long-term gain from selling securities with $30,000 basis, or no federal taxable incom... - Medicare income-related monthly adjustment amounts generally use modified adjusted gross income from two years earlier, so a Roth conversion or capital gain can affect future premiums. - Traditional IRA distributions are generally ordinary income, while selling appreciated assets in a taxable brokerage account usually realizes only the difference between sale proceeds and adjusted basis. - Roth IRAs do not require lifetime distributions for original owners, while traditional IRAs generally do once the applicable required beginning age is reached. # How to Build a Tax-Diversified Retirement Portfolio *Give future withdrawals more than one tax treatment* September 26, 2026 A retirement portfolio can hold hundreds of securities and still leave its owner with very little tax flexibility. If nearly every dollar sits in a traditional retirement account, a large purchase may require a large taxable distribution. Investment diversification addresses what you own. Tax diversification addresses the accounts from which you can spend. A durable retirement plan needs both. I would not begin by prescribing equal amounts in three account types. I would begin with the family's expected spending, existing balances, and likely changes in income. The objective is to create useful choices without paying unnecessary tax to manufacture a perfectly balanced account statement. This memo addresses federal planning principles as of September 18, 2026; state taxes and individual circumstances require a separate calculation. ## Understand the three tax treatments Traditional retirement accounts generally defer tax on investment earnings until distribution. Withdrawals attributable to deductible contributions and earnings are ordinary income. Nondeductible IRA contributions require basis tracking; they do not make an entire account tax free. These accounts remain valuable when a deduction during working years is worth more than the eventual withdrawal tax. 1 Roth accounts reverse the timing: contributions do not generate a deduction, while [qualified distributions are tax free](https://www.irs.gov/retirement-plans/roth-iras). For a Roth IRA, qualification generally requires the five-tax-year period plus age 59½ or another qualifying condition. A conversion has its own considerations; simply owning a Roth does not make every withdrawal qualified. 2,3 A taxable brokerage account has a different advantage. Selling an investment generally realizes the difference between proceeds and adjusted basis, rather than making all proceeds taxable. [Holding period matters](https://www.irs.gov/taxtopics/tc409): gains on assets held more than one year generally receive long-term treatment. Interest, dividends, and fund distributions may create tax even when no money leaves the account. 4,5 These are account characteristics, not three investment strategies. A stock allocation can span all three. Cash held inside an IRA still carries the IRA's distribution rules. Building tax flexibility therefore requires a household account inventory alongside the investment allocation. ## The same cash can create different income Consider a hypothetical married couple, both age 67, funding an extra $40,000 expense. Assume their traditional IRA is entirely pretax; securities available for sale have $30,000 of adjusted basis and have been held more than one year; and their Roth IRA withdrawal is qualified. Figure 1 compares the income recognized by accessing $40,000 before paying any resulting tax. The traditional IRA produces $40,000 of ordinary income. Selling the securities realizes $10,000 of long-term gain. The qualified Roth withdrawal produces no federal taxable income. A blended approach, using $20,000 from the IRA and selling half the specified securities, produces $20,000 of ordinary income and $5,000 of long-term gain. These are deterministic illustrations of the rules, not estimates of the couple's tax bill. 1,2,4 The distinction between income and tax is essential. The chart does not assume a tax bracket or suggest that ordinary income and capital gains face the same rate. It excludes state tax, investment income surtaxes, benefit interactions, transaction costs, and any additional withdrawals needed to pay tax. A real $40,000 after-tax spending target requires a second calculation that includes those effects. Nor does the chart prove that the Roth should always pay. Spending Roth assets today gives up their future use. Choosing a modest traditional distribution during a low-income year may be more attractive than preserving every pretax dollar for later. The right comparison spans several years and includes the remaining balances under each alternative. ## Build flexibility gradually For someone still working, new savings are often the least disruptive way to change the mix. Compare available pretax and Roth workplace contributions, capture an available employer match, and maintain accessible savings for expenses before retirement. Direct IRA contributions require eligible compensation, and Roth IRA eligibility depends on income and filing status. Verify the year's limits before directing contributions. 6 For a retiree with a large pretax balance, partial Roth conversions may add flexibility. The taxable portion of a conversion creates current income, and conversions cannot simply be reversed through recharacterization. Model the amount and reserve money for the resulting tax before executing. 3 Our discussion of [creating flexible income in retirement](https://www.perissosprivatewealth.com/insights/creating-flexible-income-in-retirement) develops the connection between conversions and future withdrawals. An apparent conversion opportunity can shrink after other income arrives. A year-end capital-gain distribution, consulting payment, or large sale may change the result. I prefer a tentative annual conversion budget that is refreshed with the CPA when the year's income becomes clearer. Converting an amount solely to reach a desired Roth percentage substitutes an accounting target for a planning decision. Do not overlook the cost of using outside cash to pay conversion tax. That cash may otherwise fund repairs, care expenses, or several years of withdrawals. A conversion that improves a distant projection but leaves the household short of liquid reserves can weaken the immediate plan. ## Coordinate taxes with the rest of retirement [Medicare’s income-related premium adjustments](https://www.ssa.gov/benefits/medicare/medicare-premiums.html) consider modified adjusted gross income, generally using tax information from two years earlier. A conversion or realized gain can therefore affect costs beyond the current tax return. 7 For someone receiving Social Security, additional income can also make more benefits taxable; a qualified Roth distribution generally avoids that particular income increase. 8 The comparison should include these interactions rather than treating the marginal income-tax bracket as the entire cost. Investment income may also trigger the [net investment income tax](https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax). Retirement-plan distributions are generally excluded from net investment income, but can increase modified adjusted gross income and expose other investment income to the tax. 9 Municipal interest is another reminder that federally tax-exempt income can still matter elsewhere: it enters the Medicare premium income calculation. 7 Required distributions limit how much control a retiree has over pretax accounts. Roth IRAs do not require lifetime distributions from their original owners, while traditional IRAs generally do once the applicable starting age is reached. 3 For a household approaching that transition, project required withdrawals alongside pensions, Social Security, and spending before deciding which account to draw down voluntarily. ## Keep the investment plan coherent Asset location asks which investments belong in which account. Taxable interest, expected turnover, unrealized gains, and the time before withdrawals all matter. But an account-level tax preference should not accidentally make the household's total portfolio more aggressive. Moving bonds into an IRA and stocks into a Roth still requires a combined view of risk and available spending resources. The same discipline applies to rebalancing. Selling appreciated investments in a brokerage account can create tax, while an IRA's internal trades generally do not create current distribution income. 3,4 Review whether rebalancing can occur within retirement accounts or through new cash flows before realizing gains unnecessarily. The related questions are developed in [Tax Planning In Retirement](https://www.perissosprivatewealth.com/insights/tax-planning-in-retirement). This approach may be a poor fit when obtaining the desired account mix requires a large conversion at an unfavorable rate, sacrifices essential liquidity, or pays tax now on assets intended for charity. A household already facing lower expected retirement income may sensibly retain substantial pretax savings. Tax diversification offers choices; it does not require abandoning a valuable deduction. ## Put an annual withdrawal policy in writing Start with a one-page inventory showing each account's tax treatment, ownership, basis records, withdrawal restrictions, and intended use. Then build next year's spending plan and identify the income that arrives regardless of discretionary withdrawals. Ask the CPA to compare several withdrawal and conversion combinations, including a scenario in which one spouse dies or an unusually large expense occurs. Document the chosen amounts, the cash reserved for taxes, and the circumstances that would prompt a change. Revisit the plan before a major sale or distribution, not only when the tax return is prepared. The practical result should be a clear answer to a future spending request: which account will fund it, what income it creates, and why that choice improves the family's broader plan. All my best, Brandon VanLandingham, CFA, CMT, CFP Founder / CIO ## Related Reading [The Hidden Costs of "Buy and Hold" for Retirees Drawing Income](/insights/sequence-of-returns-risk-retirement-income) [Reducing Capital Gains on a Highly Appreciated Portfolio](/insights/reducing-capital-gains-highly-appreciated-portfolio) [The 4% Rule Is Dead: What Replaces It in 2026](/insights/the-4-rule-is-dead-what-replaces-it-in-2026) ## Citations - IRS, Traditional and Roth IRAs, distribution tax treatment. - IRS, Roth IRAs. - IRS, Publication 590-B, IRA distributions, Roth qualification, conversions, and required distributions. - IRS, Topic 409, Capital Gains and Losses. - IRS, Publication 550, Investment Income and Expenses. - IRS, Publication 590-A, Contributions to Individual Retirement Arrangements. - Social Security Administration, Medicare Premiums. - IRS, Publication 915, Social Security and Equivalent Railroad Retirement Benefits. - IRS, Questions and Answers on the Net Investment Income Tax. ## Important Disclosures This piece is educational. It is not legal, tax, or accounting advice and is not a recommendation to take or refrain from any specific action. Tax law is fact-specific and changes regularly. Please coordinate any decisions discussed here with your attorney, your CPA, and Perissos before acting. Perissos Private Wealth Management is a Registered Investment Adviser ("RIA"). Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Perissos Private Wealth Management renders individualized investment advice to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. 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Perissos Private Wealth Management will provide all prospective clients with a copy of our current Form ADV, Part 2A (Disclosure Brochure), Part 2B (Supplemental Brochures), and Part 3 (Client Relationship Summary) prior to commencing an advisory relationship. You can also view these documents at any time at adviserinfo.sec.gov or by contacting us requesting a copy. ## Frequently asked questions ### What does tax diversification mean in retirement planning? Tax diversification means holding retirement assets across accounts with different tax treatments, such as traditional, Roth, and taxable brokerage accounts. That can create more choices over how much ordinary income or capital gain is recognized in a given... ### Why not keep all retirement savings in a traditional IRA or 401(k)? If most assets are in pretax accounts, a large withdrawal may create a large amount of ordinary income in the year it is taken. A mix of account types may provide more flexibility for spending, Medicare premium planning, and Social Security taxation. ### Are Roth conversions always the best way to improve tax flexibility? No. Partial Roth conversions can add flexibility, but the taxable portion creates current income and may affect Medicare premiums or other tax interactions, so the amount should be modeled carefully. --- Source: [Perissos Private Wealth Management](https://www.perissosprivatewealth.com/insights/tax-diversified-retirement-portfolio) — fee-only fiduciary wealth management in Bethany, Oklahoma. 405.212.9690. This article is educational and is not personalized financial, tax, legal, or investment advice.