(WN): “Don’t let the tax tail wag the investment dog” is a quirky saying that has been a mainstay for financial advisers for many years. It means to not let tax issues override smart investment decisions. However, smart tax planning is essential for smart investing.

The key with tax planning is to be proactive, and a good place to start is with a tax diversification strategy. I recommend that my clients have three tax buckets for their investments. This strategy can lead to tax savings now or in the future, and it also provides flexibility when taking withdrawals during retirement.

In your 20s, funding your 401(k) might have sounded like a good goal for your 30s. Now that your 30s are here, you might be nervously noticing the countless articles on the virtues of investing in your 20s. This isn’t one of those articles. Getting started now gives you plenty of reasonable paths to build a healthy $1 million by retirement.

Here are five steps to help you achieve that goal.

Self-employment definitely has an upside. You have a lot more control over your life when you work for yourself. The inevitable trade-off is that you lose the perks that many employees take for granted, like a steady paycheck, paid sick leave, and an employer-sponsored retirement account to help you someday leave the workplace forever.

I can't help you out with the first two, but if you're self-employed, then you owe it to yourself to consider opening a SEP-IRA. These tax-advantaged retirement accounts have the benefits of a 401(k) and an IRA all wrapped up into one sweet package.

Bucket 1 is for tax-deferred assets, such as retirement accounts like traditional IRAs, 401(k)s, or 403(b)s. Typically, the money you invest in a traditional retirement account is deducted from your income in the year of the contribution. Taxes are not due until the money is withdrawn, and whatever amount is withdrawn (after age 59½ to avoid a penalty) is considered taxable income. IRAs have been available since 1974, and are a common way to save for retirement.

Having all of your invest-ments in Bucket 1 is a wise strategy if you expect your tax rate to be significantly lower in retirement. However, many people find this is not the case. Income from pensions and Social Security, combined with the income taxes triggered by withdrawals from Bucket 1, can keep the tax rate high.

Bucket 2 is for taxable accounts. Many people do not realize that saving and investing in a taxable account is always wise. The gains on the investments are not tax-deferred, but they are taxed at a preferential tax rate on capital gains and qualified dividends. This tax rate is often 15 percent, but it can be as low as 0 (for people in the 10 percent or 15 percent marginal tax bracket) or as high as 23.8 percent for people with very high incomes.

Bucket 3 is the newest tax bucket, and it contains tax-free accounts, such as Roth IRAs and Roth 401(k)s. Roth IRAs only became available in 1998, and many employers began offering Roth 401(k)s and Roth 401(b)s. Investors often do not have a Bucket 3. Money invested in these accounts is not deducted from income in the year of the contribution, so there are no tax benefits on the front end. However, the beauty of Roth IRAs and Roth 401(k)s is that they provide tax-free growth for the future.

In my view, tax-free growth surpasses tax-deferred growth (in traditional IRAs and 401(k)s), and I encourage you to open a Roth IRA or a Roth 401(k) and start funding it. Studies have shown that millennials are opening Roth IRAs more than any other age group.

***The Benefits***

Why am I encouraging everyone to have three tax buckets for their investments? The benefits are significant. You can choose where to withdraw money during retirement. Many investors have most of their money in tax-deferred IRAs (Bucket 1). Every time they need to take a withdrawal during retirement, it triggers income taxes.

This is not tax-efficient. The higher taxes from IRA withdrawals can also cause Social Security benefits to be taxed at a higher rate, and Medicare Part B (which is withheld from Social Security benefits) to cost more each month. Drawing from Bucket 2 will trigger capital gains taxes (only on the gains/not the entire amount withdrawn), but they are typically less than income taxes. And drawing from Bucket 3 can be tax-free.

Three tax buckets can allow you to delay drawing Social Security benefits. By starting later, Social Security benefits accrue and increase. Taxes will be managed (and reduced) by having the variety of tax buckets, rather than only Bucket 1. Delaying Social Security can also open a window of opportunity to convert a portion of a traditional IRA to a Roth IRA during the years after retirement but before starting Social Security. These years often have a low tax rate, making them attractive for Roth conversions.

Converting a significant amount of a traditional IRA to a Roth IRA can reduce required withdrawals from the traditional IRA that must begin at age 70½. Roth IRAs do not have required minimum distributions, so the money can remain invested in the Roth IRA, growing tax-free for many years.

Roth IRAs are excellent investment accounts for teenagers and young adults. Although the gains have limitations as to when you can access them (which encourages investors to leave them for retirement), the contributions are always accessible with no penalty or taxes. This makes the Roth IRA a great option for funding the purchase of a first home or for college expenses.

Roth IRAs provide estate planning benefits. When a person inherits a Roth IRA, annual withdrawals are required, but the withdrawals are tax-free. When a person inherits a traditional IRA, annual withdrawals are required, but the beneficiary pays income taxes on the withdrawal.

***The $15,834 Social Security bonus most retirees completely overlook***

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more each year. Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.