Will Your Taxes be Lower When You Retire?

Posted on May 27, 2023

Will Your Taxes be Lower When You Retire?

We estimate how much tax we will need to pay in retirement so that we can plan better for our future, but predicting the tax rate prior to retirement is difficult. It will be higher, but will all of your retirement income be impacted by it? How the increased taxes will impact the tax brackets is another question that cannot be answered at present. At the same time, some estimation can be made. Forbes discusses how your tax rate in retirement might be less than you think:

“When you’re working, the bulk of your income is from your job and is fully taxable (after deductions and exemptions) at ordinary income tax rates. When you’re retired, this is only true for pension income, withdrawals from taxable retirement accounts, and any rental, business, and wage income you have. Social Security is taxed at ordinary income rates but only part of it is taxable. Withdrawals from Roth accounts are tax-free if you’ve had the account for at least 5 years and are over age 59 1/2. Accessing the principal from savings and investments is tax-free and long term capital gains are taxed at lower rates or can even reduce your other taxes if you’re selling at a loss. (Gains on inherited investments are only taxed from the point that you inherited them.)

“But what if all of your retirement income is fully taxable?

“Your Income Will Probably Be Lower

“Experts typically recommend that you need about 80% of your pre-retirement income in retirement. But depending on your situation, you may need even less. How much of your income goes to saving for retirement and paying into Social Security? Do you have a mortgage and other debts that will be paid off? Do you have kids that will no longer be financially dependent on you? How much do you spend on commuting and other work-related expenses? Will you eat lunch out less often since you’re no longer at work during the day and have more time to prepare your own meals? Are you thinking of downsizing or moving to a lower cost area? When you add all this up, you may find that you need less than 80%.

“If your income is lowered enough, you may retire in a lower tax bracket.”

If you are planning for your retirement, you may even consider retiring in a state that is tax friendly. Many states, including Florida and Texas, do not tax income. Migrating to a tax-friendly state can help you to save better and live better now.