The 3 investment accounts you need to maximize your money-and minimize your taxes

The earlier you invest, the more time your money has to grow. But figuring out the exact accounts to use can feel overwhelming.

After setting aside money to cover daily expenses in a checking account and three to 12 months of expenses in a savings account, you shoudl start looking into putting any additional income into three different investment “buckets,” says Jaime Bosse, a certified financial planner and senior advisor at CGN Advisors in Manhattan, Kansas.

“If you have too much in cash,you’re actually losing money to inflation,” Bosse says. “Any extra dollars you have should be invested in growing for the future.”

With three investment accounts, you’ll have more flexibility to tap your money when you need it and more control over your tax bill now and later as each “bucket” offers different benefits, bosse says.

How to best allocate your money across the different types of accounts will vary based on your income and situation, she says, but the bottom line is you should be using them to your advantage. Be sure to speak with a trusted financial professional for individualized advice.

Here are the three buckets she suggests and how they work.

1. Tax-deferred bucket

Examples: Customary IRA, 401(k), 403(b)

Tax-deferred accounts, like a traditional 401(k) or individual retirement account, let you contribute pre-tax money from your paycheck into an investment account. This lowers your taxable income for the year you contributed, and your investments grow tax-deferred until retirement.

Withdrawals are taxed as income and usually penalty-free starting at age 59. Taking money out earlier may trigger taxes and a 10% early withdrawal penalty.

2. Tax-free bucket

Examples: Roth IRA, Roth 401(k), Roth 403(b)

you contribute money you’ve already paid taxes on to Roth accounts.Your investments then grow tax-free, and once you reach 59, qualified withdrawals aren’t taxed or penalized. Roth IRAs, in particular, also add flexibility by allowing you to withdraw money you’ve contributed at any time without penalty.

These accounts are ideal if you expect to be in a higher tax bracket in the future or want tax-free income later on,Bosse says.

3. taxable bucket

Example: brokerage accounts

Taxable brokerage accounts don’t offer any immediate tax benefits, but they give you the most flexibility. You can invest in a wide range of assets, and there are no restrictions on when or how you withdraw your money. However, any profits you make-from dividends, interest, or selling investments-are subject to capital gains taxes.