During all of our working years, almost all of us pay something in taxes. Call it an income tax, call it social security tax, call it employment tax; at the end of the day, money you involuntarily pay to a government is a tax, regardless of its label.
Predicting your tax rate in retirement can be difficult because forecasting your income, what investments you’ll sell, from which accounts you’ll sell those investments, and your dividend and interest income creates a sometimes complex mix of factors.
So planning through various scenarios can be enlightening as you develop a strategy to manage your taxes in retirement. Here, we explore scenarios and look at effective tax rates during retirement to aid in your planning.
In general, the higher your income when working the higher your income tax rate. The more taxable income you need to generate to meet your spending needs in retirement, the more tax you will generally pay.
The next thing that determines your tax rate is your marital status. The same amount of income will generally be taxed at lower rates in households married and filing jointly than for single taxpayers.
Another consideration is state income taxes. Each state taxes income differently. Seven states have no state income tax. Eleven states have a flat income tax structure. The remaining states have graduated rates.
Finally, how you generate retirement income matters. Different forms of income are taxed differently. During working years, you pay payroll taxes on earned income.