What Is My Retirement Tax Rate? How to Estimate

See what affects your tax rate on retirement income, and get information to help you estimate future tax costs.

The taxes you pay in retirement directly affect how much you can spend. Whatever is left after taxes is available for fun, food, healthcare, and more. So it’s important to understand how tax rates work.

This knowledge helps you make decisions during your working years and in retirement. For example, should you make Roth conversions? Should you contribute to a pre-tax 401(k) account or Roth 401(k) (or that can apply to IRAs, as well)?

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In general, the more income you have, the higher your tax bracket. But income can come in various flavors, and different types of income can have surprising effects on your tax return. Another major factor is the potential for tax law changes. Only time will tell what happens.

Knowing about your current and future tax brackets can help you make informed decisions. You can’t predict the future perfectly, but you can make the best decision possible with the information available today. Of course, you’ll need to adjust things as time goes on and the future unfolds.

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We’ll discuss marginal tax rates, the effective tax rate, and more. And keep in mind that different types of income can get taxed in different ways. Your Social Security income might be tax-free (or at least 15% of it would be tax-free). Plus, qualified dividends and long-term capital gains may also get special treatment.

Resources:

Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.

CHAPTERS:
00:00 Tax Rates Help With Decisions
01:09 Why Tax Rates Matter for Retirement
05:32 Marginal vs. Effective Tax Rates
09:59 What Affects Your Income Tax Rates?
12:20 Managing Your Income in Retirement
14:48 Other Costs (Phantom Taxes)
15:57 Will Tax Laws Change?

IMPORTANT:
Triple-check everything before making decisions or filing a return. It's impossible to cover everything you need to know in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA or other trusted tax expert before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.

[lulucly]

Thank you so much for the information presented in a clear and concise manner

[amarsingh-ieoh]

Thanks..It helped me understand many things....🙂

[punisher]

Thanks for the content. Catching up on your content.

[joettejouglard]

Thank you, very helpful. I need to find the planning software (for dummies) so I can play with the numbers.

[Bondbeer]

Good video. On the first example, with same tax brackets. If you are in the 25% bracket, you are correct the tax is $25, which is paid in full up front on the entire amount because it is all taxed in your top tax bracket after your earned income. However, if you are in the 25% bracket in retirement, the withdrawals from your tax deferred accounts will be paid at a mix of rates, with only a portion taxed at 25%. In addition, you are paying tax with future dollars, worth less due to inflation. Therefore, if you will be in the same tax bracket, a tax deferred account comes out ahead all other things being equal.

[davidfolts]

Thanks, Justin, for the great content; I have always liked your cool graphics.

[urbina]

Awesome Job - where can I get a copy of that spreadsheet?