Why You’re Likely To Be In A Higher Tax Bracket When You Retire


Something has been bugging me about IRAs lately. Most of the time I read an article or discussion about Traditional IRAs, as opposed to ROTH IRAs, I see that it is a pretty common assumption that income tax rates will be lower when one retires. Every time I see any mention of tax rates most definitely being lower in retirement I cringe. This appears to be the most commonly mentioned benefit of a Traditional IRA over a ROTH IRA, but to me it just doesn’t make any sense. For many of us the odds are that our income tax rate will actually be higher in retirement. Here are the reasons why:

Income Tax Rates are at Historic Lows

Before the Bush Tax Cuts my spouse and I both worked and we pai


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8 Responses to Why You’re Likely To Be In A Higher Tax Bracket When You Retire

  1. Pingback: Analyzing Wealth

  2. Alex says:

    Thanks for the interesting article Teri.
    You say: “I actually have a lot of reasons why I would avoid a ROTH.”

    Would you be able to outline what your knocks are on Roth IRAs?

  3. Amy F. says:

    Yes, I think that would make a great future post. :)

  4. Diane says:

    Our required minimum distributions starting in four years is going to throw us into a higher tax bracket from then on. We are thinking of converting some of our 401 funds into a Roth but the amount we can convert at a lower tax rate will not make that much difference in our income once the RMD begins. We should have been converting funds to the Roth for the past few years but didn’t pay any attention to the problem.
    And, I agree with Alex, would like to know why you think we should avoid a Roth.

  5. Engineer says:

    There’s one other factor that could make your tax rate higher in retirement. Tax deferred distributions can result in $.50 and as much as $.85 of Social Security income for each $1 of taxable distribution. So a 15% bracket is effectively increased to either 22.5% or 27.75%. And a 25% bracket is effectively increased to either 37.5% or 46.25%.

  6. Teri Newton says:

    I should clarify a lot of reasons why ROTHs aren’t always #1, or why not to put all your eggs in one basket. I will work on a future article to explain on the subject – good idea.

  7. jIM says:

    I think taxes went down more for the deductions than it did because of the tax cuts.

    I say this because wife and I both work and paid about 7% effective tax rate last year on a gross income of 100k+.

    Next year with same income and two kids (having twins in June) show the 3k tax refund we received this year going up to 9k next year. Our effective tax bill is significantly lowered because of the tax credit.

    The fact you lowered income (one spouse left workforce) would also indicate that taxes paid would get lower.

  8. PapaGeek says:

    Engineer has stated the biggest tax problem for seniors, one that is rarely mentioned in the articles and forums. Let me give an example for a single individual who’s SS check is $30,000 per year:
    IRA/Pension $00,000 to $10,000 tax rate 0%
    IRA/Pension $11,000 to $16,000 tax rate 15%, 10% plus 50% of SS
    IRA/Pension $16,000 to $21,000 tax rate 22.5%, 15% plus 50%
    IRA/Pension $22,000 to $30,000 tax rate 27.75%, 15% plus 85%
    IRA/Pension $31,000 to $41,000 tax rate 46.25%, 25% plus 85%
    IRA/Pension $42,000 and up tax rate 25%, 25% plus 0%, you’ve hit the max
    At a total income of only $52,000 your tax rate is now higher than what you probably saved, 25%, when you put your money in your 401K.
    From $61,000 to $71,000 you pay a higher tax rate than millionaires. The highest tax rate is only 35%, you are paying 46.25%.

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