Tax Rates in Retirement
Question: When I retire, will I be in a higher or lower tax bracket than when I was working?
Answer: It depends. Many soon-to-be retirees assume their retirement tax rate will be less than their tax rate during their working period. In reality, you may have stopped working your 9 to 5 job, but Uncle Sam can still dig deep in your pocket, for the following three reasons:
- Generally, retirees have limited tax deductions in their golden years. There’s no mortgage interest deduction anymore, given that their homes have already been paid off or about to be paid off, claiming dependents is no longer the case since children are living on their own and annual tax-deferred 401(k) contributions no longer reduce your income. Therefore, most of your retirement income will be taxable.
- After so many years of hard work, retirees want to spend their golden years relaxing and having fun. Unfortunately, these things don’t come cheap. Traveling and engaging in old or recently discovered hobbies might put a dent in your retirement savings. Therefore, the money you save for yourself in retirement might be similar to what you were earning in your job.
- Future retirees might pay higher taxes than current retirees. Compared to previous times in history, today’s tax rates are rather low. The top tax rate of 37% in 2020 is peanuts money compared to the 94% of the 1940s and the 70% of the 1970s. But the current national debt is greater than what America produces in a whole year and its ascending trend might influence future taxes, making them higher than they are today.
More advice: 22 Ways to Protect Your Retirement From a Possible Recession
