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What Will Your Tax Rate Be In Retirement?

“In this world, nothing is certain except death and taxes.” -Ben Franklin, 1789

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.

In this post, from Can I Retire Yet?, we explore scenarios and look at effective tax rates during retirement to aid in your planning.



What is your effective tax rate? What will your tax rate be in retirement?

These are fundamental questions for financial planning. They help determine:

Conventional wisdom around these topics assumes that most people:

  • Have a good idea what their current effective and marginal tax rates are.
  • Can predict with reasonable accuracy what their future tax rates will be.

I would argue that many people have little idea how much tax they currently pay. Even fewer can predict the future with reasonable accuracy.

For example, I recently received an email from a reader. He writes in part, “So at a 25% effective tax rate (an) $85k (withdrawal) supports (only) $64k in annual (retirement) spending.”

My initial gut reaction was a 25% effective tax rate on $85,000 of retirement income is grossly overestimated, maybe even impossible. So I decided to run some numbers.

My goals were to:

  1. Confirm whether or not my instincts were correct.
  2. Help you determine a realistic assumption for your effective tax rate in retirement.

Let’s dive into some numbers….


Variables That Impact Your Tax Rate


There is no single “right” answer as to what your tax rate will be in retirement. Several factors impact your tax rate.


Higher Income, Higher Income Tax Rates

The first factor that impacts your tax rate is how much income you make during your working years. In retirement, this shifts to how much taxable income you need to generate to meet your spending needs.

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.

For the sake of this example, let’s stick with this reader’s suggestion of an $85,000 income. I’ll demonstrate how to calculate the effective tax rate on this retirement withdrawal in a variety of retirement scenarios. You can then do your own calculations based on your spending needs and circumstances.


Single vs. Married Filers

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. That’s because the same amount of income can be spread across wider tax brackets when married filing jointly.

We’ll consider both single and married filing jointly households. This may be especially helpful to see for married couples who plan only with the assumption that both spouses will live long lives. Generally, one spouse will die before the other, sometimes much earlier, considerably changing the tax situation.

Related: Adjusting Early Retirement Plans After the Death of a Spouse


State Income Taxes

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.

In addition to these different tax structures, states consider different sources of income taxable and may tax different sources at different rates. For example, there is variability between states regarding whether they tax Social Security benefits at all, and if so, how they tax them.

For my scenarios, I’ll use my home state of Utah as an example of a high-income tax state. Some other states (California, New York, New Jersey, etc.) have higher marginal tax rates in excess of 10% on high earners.

I chose Utah for illustrative purposes because it has a simple flat tax rate of 4.95% on almost all sources of income, including Social Security. Thus it is both relatively simple to calculate and representative of a state that is not tax-friendly to retirees with low to moderate spending needs.


How Will You Generate Income?

Finally, how you generate retirement income matters. Different forms of income are taxed differently.

During working years, you pay payroll taxes on earned income. They are 7.65% for employees, consisting of Social Security (6.2%) and Medicare (1.45%).

This is the largest tax burden for many Americans during their working years. This is particularly true for the self-employed who are responsible for both the employer and employee halves of this tax, totaling 15.3% of income until income thresholds are exceeded.

These taxes go away when you are no longer earning income. Confounding payroll taxes with income taxes is likely a contributing factor as to why people vastly overestimate their retirement tax burden.

Since the premise of the email the reader sent me is accounting for the impact of taxes on retirement withdrawals from investment accounts, we’ll assume no earned income and thus the complete elimination of payroll taxes.

For those looking to incorporate some earned income after retirement, I’ve covered that topic separately.

Related: The Amazing Tax Benefits of Semi-Retirement

Investment income tends to be taxed more favorably than earned income. The type of investment accounts you use will determine how much tax you will pay. We’ll explore different scenarios using investments in Roth, taxable, and tax-deferred accounts and Social Security income.


Comparing Retirement Tax Scenarios


I’m going to run through a series of retirement scenarios to demonstrate the range of effective tax rates that are possible on the same amount of income. You can then apply these concepts to your own scenario to help you better estimate your own tax burden in retirement.

We’ll keep the taxable income constant at $85,000 through the examples. That is the amount suggested in the email sent by the reader to produce $64,000 of spending. Note that if my assumptions are correct and the actual tax rate paid is lower than 25%, you wouldn’t need to take such a big withdrawal. In most cases, this would further lower your total taxes paid and your effective tax rate.

I share a lot of numbers in this blog post. If you aren’t clear on how retirement income is taxed, I encourage you to at least explore the scenarios most applicable to your circumstances.

If you just want the results without going through the calculations, scroll ahead to the conclusion and see if your retirement effective income tax rate assumptions are in line with my results. I also provide a no math necessary alternative to estimate your future tax rate with improved accuracy.


Calculating Effective Tax Rates: Early Retirement Scenarios


We’ll start with the worst-case tax scenario, then a few more tax-friendly scenarios to demonstrate the range of possibilities and assist you with your own tax planning.


Worst-Case Scenario: Single, Very Early Retiree, All Investments Tax-Deferred, High Tax State

This is the worst-case scenario I could create using the assumptions discussed above. All income is saved in tax-deferred accounts and thus is taxed at ordinary income tax rates.

Our 50-year-old hypothetical very early retiree is able to retire early despite putting no thought into tax diversification of investment accounts. So, all withdrawals will incur a 10% early withdrawal penalty.

Filing as a single filer narrows the tax brackets. Living in a high-tax state increases this individual’s tax burden further.

Let’s dive into the numbers.

First, we’ll calculate their federal income tax.

Income Tax Rate Tax Due
12,950 0% (Standard Deduction) $0
First 10,275 10% $1,027.50
Next 31,500 12% $3,780
Next 30,275 22% $6,660.50
Total Income = $85,000 Effective Federal Income Tax Rate = 13.5% Total Federal Income Tax = $11,468.00

Add a 10% penalty on the entire $85,000 for the early withdrawal. Total tax increases to $19,968. The effective tax rate is 23.5%. This would be your total tax burden in a no-income-tax state.

Because this hypothetical retiree lives in a high-tax state, we’ll add another 4.95% tax to the entire $85,000. State income tax would be $4,207.50.

Total federal plus state tax is $26,492.50. The total effective tax rate is 28.4%.

So it is possible to actually pay a 25% effective tax rate or more as a retiree generating $85,000 of retirement income.  But you really have to try.


Single, Retiree, All Investments Tax-Deferred

Next, we’ll keep all assumptions identical with the exception of assuming a 60-year-old retiree. This would eliminate the 10% early withdrawal penalty.

Federal and state income taxes would be the same, totaling $15,675.50 tax on $85,000 of income for an effective federal plus state tax rate of 18.4%. In a no-income-tax state, your effective rate would be 13.5%.

Simply not taking the early withdrawal penalty gets us well below the assumed 25% effective tax rate.


Married, Early Retiree, All Investments Tax-Deferred

For the next scenario, let’s assume that the $85,000 will support a couple of 60-year-olds who file their taxes married filing jointly, with all else equal to the previous scenario.

This changes the federal income tax calculation as you can see in the table.

Income Tax Rate Tax Due
$25,900 0% (Standard Deduction) $0
First $20,550 10% $2,055
Next $38,550 12% $4,626
Total Income = $85,000 Effective Federal Income Tax Rate = 7.9% Total Federal Income Tax = $6,681.00

In a no-income-tax state, this would be your total tax burden. Utah’s “high” state taxes remain the same, bringing the total taxes due to $10,888.50, for an effective tax rate of 12.8% on $85,000 in this scenario.

Notice the difference in taxes between someone married filing jointly compared to a single person. By widening the federal tax brackets applied to the same amount of income, you lower your federal marginal tax rate from 22% to 12% and your effective rate by almost 6% compared to a single filer, all else equal.

Even with no tax diversification and living in a high-tax state, we’re now at about 50% of our emailer’s assumed 25% effective tax rate. In a no-tax state, the 25% assumption overstates our actual effective tax rate by a factor of three.


Single, Early Retiree, All Investments Taxable

For our next scenario, we’ll again assume a single, early retiree, living in a high-tax state. The difference in this scenario is that they planned for early retirement and saved aggressively in taxable accounts.

How much tax you pay on taxable accounts depends on your specific situation. Taxable accounts consist of cost basis, the amount of money you contributed to the account, plus capital gains, assuming your investments have increased in value since you purchased them.

Capital gains can be short-term gains or long-term gains. Short-term gains occurred in the past year. They are taxed as regular income.

Long-term gains occurred over periods greater than a year. They receive favorable tax treatment.

For our scenarios, we’ll consider that the account is highly appreciated with only a 20% cost basis and 80% long-term capital gains.

In this scenario, you have $68,000 of taxable income. Federal capital gains are taxed as follows for someone filing taxes as an individual:

Income Tax Rate Tax Due
$12,950 0% (Standard Deduction) $0
$17,000 (Cost Basis) 0% $0
First $40,400 0% $0
Next $14,650 15% $2,198
Total Income = $85,000 Effective Federal Income Tax Rate = 2.6% Total Federal Income Tax = $2,198

***UPDATE: An astute reader, Jeff, pointed out in the comments that I forgot to apply the standard deduction in this scenario. The post has been updated to correct this error.***

At the state level, all taxable income is taxed at the same rate in Utah. Because 20% of the account is non-taxable cost basis, we apply the flat 4.95% to the $68,000 capital gain, for $3,366 of state tax.

This brings our total tax bill to $5,564 on an $85,000 retirement withdrawal, for an effective federal plus state tax rate of 6.5%.


Married, Early Retiree, All Investments Taxable

As with income tax rates, capital gains tax rates widen for married couples filing their taxes jointly.

In 2022, long-term capital gains are taxed at a rate of 0% up to $80,801 of taxable income.  In our scenario, $17,000 of their withdrawal is non-taxable cost basis, and the other $68,000 falls into the 0% tax bracket, leaving them with a federal income tax bill of $0 and an effective federal tax rate of 0%.

At the state level, we would have $3,366 of tax for an effective total tax rate of 3.96% on our $85,000 retirement withdrawal.

At this point, let’s take note of the difference between the proposed effective tax rate of 25% and our calculated effective tax rates. It widens so much that the original assumptions are not valid.

In reality, someone in this situation could:

  • Substantially increase retirement spending.
  • Convert tax-deferred investments to Roth at favorable rates and/or harvest capital gains on taxable accounts at a rate of 0% to further raise their cost basis, reducing their future tax burden.
  • Simply take what they need to generate the desired $64,000 of retirement income and pay even fewer taxes than shown above.


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Single or Married Retiree, All Investments in Roth Accounts

If you use only Roth IRA accounts to generate retirement income, you will pay no tax in retirement at the federal or state level. Your effective tax rate would be zero.

Before you get too excited about this, remember that these accounts are not tax-free accounts. They are tax-free after having already paid income tax in the year the money was earned and the contribution to the account was made. The money then grows tax-free and it can be taken from the accounts tax-free in retirement.

Depending on the rates you would have paid when working and the rates you will pay in retirement, that may or may not be a good deal for you.


Calculating Effective Tax Rates: Traditional Retirement Scenarios


These simplified scenarios demonstrate how different sources of retirement income are taxed. Keep in mind that we save for retirement over the course of decades.

Over that time our circumstances and strategies change. As a result, many of us end up with a mix of tax-deferred, Roth, and taxable accounts that we can use to meet our retirement spending needs. Most of us will also receive Social Security retirement benefits at some point.

Let’s create a few more scenarios to see what happens to our effective tax rates when we combine these sources of income.


Mixing Taxable, Tax-Deferred, and Roth Accounts

Let’s assume that a retiree has amassed substantial taxable, tax-deferred, and Roth accounts. For this scenario, let’s suppose the retiree is in their early 60’s.

They have full access to all of these accounts without penalty. They are not yet receiving Social Security benefits or required to take required minimum distributions from tax-deferred retirement accounts.

We’ve established that a married couple will pay fewer taxes than an individual, all other things equal. So let’s focus on the higher tax situation of individuals.

Let’s again make no attempt at tax optimization. We’ll simply take $28,333, a third of our $85,000 withdrawal, from each account.

Withdrawals from tax-deferred accounts are taxable at regular income tax rates.

Income Tax Rate Tax Due
$12,950 0% (Standard Deduction) $0
First  $10,275 10% $1,027.50
Next $5,108 12% $612.96
Total Income = $28,333 Effective Federal Income Tax Rate = 5.8% Total Federal Income Tax = $1,640.46

Withdrawals from Roth accounts are tax-free.

The gains from taxable accounts are subject to taxes. We’ll stick with the assumption that 80% of the account is long-term capital gains. So the taxable portion of the withdrawal is $22,667

With a total taxable income of $51,000 ($28,333 withdrawal from tax-deferred account + $22,667 of long-term capital gains), $10,600 of the long-term capital gains are taxable at a rate of 15%. This is $1,590 of long-term capital gains tax.

The total federal income tax is $3,230 on $85,000 of retirement withdrawals from a tax diversified portfolio, an effective federal income tax rate of 3.8%.

In our high-tax state, an additional $2,525 state income tax is owed. That is an effective state tax rate of 2.9%.

The total federal plus state tax owed is $5,755 for an effective federal plus state income tax rate of 6.7%.

Married couples, in this scenario, would pay a total of $243 federal income tax on the tax-deferred income. All long-term capital gains are tax-free. State taxes would be the same.


Mixing Tax-Deferred and Social Security Income

For a final scenario, we’ll look at the tax burden of someone who is creating retirement income from a mix of Social Security and tax-deferred investments. We’ll assume half, $42,500 from each source.

It should now be apparent from prior examples that the ability to generate some income with Roth or taxable accounts will lower the tax burden.

We’ll first look at a single tax filer in an attempt to give the least favorable tax scenario.

The amount of Social Security benefit that is taxable is dependent on the size of your Social Security Benefit and other taxable income.

My scenario will be a little off (overestimating taxes due) for 2022 calculations. I used Worksheet 1 from IRS Publication 915 to determine the amount of Social Security Benefits that are taxable. I used the 2021 IRS Form 1040 to determine taxable income for the calculations. The 2022 forms were not yet available at the time I was working on this blog post, so I used the 2021 forms.


Single Filer, 50% Tax-Deferred, 50% Social Security

For a single filer, the taxable amount of the $42,500 Social Security benefit in this scenario would be $36,125. After subtracting the standard deduction of $12,950, this leaves taxable income of $65,675.

Income Tax Rate Tax Due
$6,375 0% (Non Taxable Portion of SS) $0
$12,950 0% (Standard Deduction) $0
First $10,275 10% $1,028
Next $31,500 12% $3,780
Next $23,900 22% $5,258
Total Income = $85,000 Effective Federal Income Tax Rate = 11.8% Total Federal Income Tax = $10,066.00

Utah uses the federal formula to determine your taxable social security benefits. The taxable benefits are taxed at 4.95%. So the state tax in this scenario is $3,892.

The total federal plus state income tax on $85,000 would be $13,958. The federal plus state effective tax rate for a single filer in this high tax state would be 16.4%.


Married Filers, 50% Tax-Deferred, 50% Social Security

For a married filer, the taxable amount of the $42,500 Social Security benefit in this scenario would be $26,463. After subtracting the standard deduction of $25,900, this leaves taxable income of $43,063.

Income Tax Rate Tax Due
$16,037 0% (Non Taxable Portion of SS) $0
$25,900 0% (Standard Deduction) $0
First $20,550 10% $2,055
Next $22,513 12% $2,702
Total Income = $85,000 Effective Federal Income Tax Rate = 5.6% Total Federal Income Tax = $4,757

The taxable benefits are taxed at 4.95%. So the state tax in this scenario is $3,414.

The total federal plus state income tax on $85,000 would be $8,171. The federal plus state effective tax rate for married filers in this high tax state would be 9.6%


What Is A Realistic Effective Income Tax Rate to Assume in Retirement?


Hopefully, these scenarios show that the amount of tax you pay can vary considerably depending on your specific circumstances.

Technically I was wrong. You could pay an effective tax rate greater than 25% in some years on $85,000 of retirement income. But that would require a combination of unfavorable assumptions and a 10% early withdrawal penalty, which would not persist into the traditional retirement age.

Eliminating paying early withdrawal penalties, the worst-case scenario we found for a single filer was paying an effective federal plus state tax rate of 18.4%. That’s about ⅓ less than the assumed 25% effective tax rate on an $85,000 retirement withdrawal.

The worst-case scenario for a married couple is paying an effective federal plus state tax rate of 12.8%. That’s about 50% of the assumed 25% effective tax rate.

Those are the worst-case scenarios! For those living in a state with no or lower income taxes, utilizing the married filing jointly status, and/or possessing diversification between taxable, tax-deferred, and Roth accounts the numbers are even more favorable.

Run your own numbers. You may be pleasantly surprised at how low your taxes can be in retirement.


An Easier Way to Estimate Your Retirement Tax Rate


Understanding how taxes are calculated on different sources of retirement income can be tedious and is not intuitive. Accurately estimating your retirement tax rate becomes more challenging if you are considering retirement locations in different states, which each have different tax structures. But it is worth a little bit of effort to familiarize yourself with these concepts.

However, once you understand the basics, it is much faster and easier to use a quality retirement calculator that computes federal and state taxes. Both the Pralana Gold and NewRetirement PlannerPlus calculators that affiliate with this blog do this. It is one of their most valuable features.


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5 thoughts on “What Will Your Tax Rate Be In Retirement?”

  1. Nice to see someone writing about the decumulation stage. It can also be useful during accumulation stage to get a better sense of your after-tax asset allocation/risk and progress towards FI. Even a rough guess at tax rates in retirement is better than ignoring or assuming the worst. Your article about your money being worth more (it still is more than the loonie) was when I started really thinking about it. Those planner calculators look quite neat. I built one for the Canadian context. Not as fancy or precise, but good enough for me.

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. I’m a single filer who just retired at age 54 (turning 55 this year, so I am allowed to access 401k funds without the extra 10% penalty, using the ‘Rule of 55’). I have funds in employer retirement accounts, a traditional IRA, a Roth IRA, and regular brokerage accounts. I figured out pretty quickly that if I drew from the 401k up to my standard deduction amount and took the rest of my income from long term capital gains (staying in the 0% zone), I wouldn’t owe any federal tax. My state tax rate will be 4.75% in 2023, dropping to 4% by 2026. With the state standard deduction amount similar to the federal amount, and some of my annual spending being my investment basis, I’m looking at paying about 2% state tax on my entire annual budget until I’m taking SS and/or RMDs at my total income tax amount. I’m saving my Roth accounts for last, as I’d like to maximize the amount I use from taxable/tax deferred accounts without actually triggering tax on those withdraws; and because later on when I’m drawing SS and potentially taking RMDs, I’ll want to keep my taxable income as low as I can to lower Medicare costs and potentially lower income tax on my SS.

    • Dean awesome job man!!! I’m hoping to not have a huge tax burden in retirement, and I’m 41 and not planning to retire until 65. seems for retirement I have to move out of NJ and stay married! glad just had date night watching Stranger Things 🙂

      • NJ doesn’t tax SS. And for retirees 62 +years old, there is a tax exemption based on total income. If income is below 150K, you can exempt retirement income 75k if single, or 100k if married.
        If you’re not familiar with this, just go to the state website for further detail.

        • nice! I had no idea thanks! I might stay in NJ after all. Hopefully NJ tax law doesn’t change.

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