{"id":620,"date":"2022-02-07T13:30:00","date_gmt":"2022-02-07T13:30:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/will-you-be-in-a-higher-tax-bracket-in-retirement-its-almost-impossible\/"},"modified":"2025-08-29T16:52:56","modified_gmt":"2025-08-29T16:52:56","slug":"will-you-be-in-a-higher-tax-bracket-in-retirement-its-almost-impossible","status":"publish","type":"post","link":"https:\/\/moneywithkatie.com\/will-you-be-in-a-higher-tax-bracket-in-retirement-its-almost-impossible\/","title":{"rendered":"Will You be in a Higher Tax Bracket in Retirement? Maybe, But It\u2019s Unlikely"},"content":{"rendered":"
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A more robust version of this analysis <\/strong>is available in Chapter 6 of Rich Girl Nation<\/em><\/a>, \u201cDon\u2019t Outlive Your Assets.\u201d<\/p>\n<\/div>\n

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Any time I open the \u201cRoth vs. Traditional 401(k)\u201d can of worms, I\u2019m inevitably met with one resounding piece of pushback:<\/p>\n

\u201cBut what if I\u2019m in a higher tax bracket in retirement?\u201d<\/h2>\n

This is the predominant argument in favor of going all in on all Roth: That (somehow) we\u2019re all going to be spending more in our golden years than we\u2019re earning<\/em> now in our careers.<\/p>\n

Today, I\u2019m going to argue something very simple: It\u2019s almost<\/em> impossible for that to be the case, and I\u2019ll show you why. <\/p>\n

Usually, this question is the result of three (very different) belief systems and circumstances:<\/p>\n

    \n
  1. \n

    Those who don\u2019t yet understand how their tax bracket is determined in retirement (I\u2019ve talked to an astounding number of people who believe their last working salary determines their tax rate for the rest of their life)<\/p>\n<\/li>\n

  2. \n

    Those who are unreasonably optimistic about their future returns but haven\u2019t actually sat down to project the numbers<\/p>\n<\/li>\n

  3. \n

    Those who are in a very low marginal tax bracket today, like 10% or 12%, but have a reasonable belief that they will spend in a way in retirement that will eclipse this (this is really the only mathematically sound rebuttal, as you\u2019ll see shortly)<\/p>\n<\/li>\n<\/ol>\n

    So let\u2019s start with the foundation: How your money is taxed in retirement.<\/p>\n

    Before we dive headfirst into this rabbit hole, I want to state something explicitly: Any time we\u2019re running loose projections for decades into the future, they become nearly meaningless because \u2013 as we extend our timeline \u2013 we extend our chances that some crazy bullshit could happen. That said, conceptually, I think this exercise is helpful, and I don\u2019t think we should throw in the towel on trying<\/em> to understand our best move just because we\u2019re \u2018planning\u2019 for something that\u2019s pretty far into the future.<\/p>\n

    How your money is taxed in retirement<\/h2>\n

    Throughout your working life, you\u2019re probably accustomed to the IRS coming with a hatchet for your earned income. Your noble benefactor (Corporate America) agrees to pay you $60,000 per year in exchange for 2,000 hours of your life, and you humbly agree.<\/p>\n

    Then, Uncle Sam skims his chunk off the top, and you take your tax haircut and go on your merry way.<\/p>\n

    (Your federal \u201ctax haircut\u201d on $60,000 is $9,806 in 2025, for the record.)<\/p>\n

    But your money in retirement<\/em> isn\u2019t based on what you earn<\/em>, because you\u2019re (theoretically!) not earning anything. This is where the folks who own 412 rental properties and mega-pensions will \u201cBUT!\u201d the shit out of this article, but stick with me. For most, retirement income is taxed based on something else:<\/p>\n

    What you spend.<\/p>\n

    You\u2019re taxed in retirement based on what you spend, not on what you earn<\/h2>\n

    Technically, your only \u201cincome\u201d comes in the form of withdrawals from your own retirement and brokerage accounts. Theoretically, you won\u2019t be withdrawing more than you need to spend (because there\u2019d be no point to take the money out otherwise). <\/p>\n

    Of course, if you work for a really long time and make a lot of money, it\u2019s possible your social security payouts will be decent \u2013 but that\u2019s hard to project from our vantage points now, 40 years away.<\/p>\n

    Some of these accounts (like your trusty Traditional 401(k) steed) are taxed like income, while others are taxed in a more favorable capital gains tax bracket (the taxable brokerage account). <\/p>\n

    It\u2019s likely you\u2019ll pay 0% tax on your long term capital gains on some or all of your withdrawals from your taxable account, thanks to the way the brackets are set up. (Some will argue that the 0% bracket might be hacked away; to that, I say, it\u2019s probably a futile effort to plan based on speculation around the tax code 40 years from now.)<\/p>\n

    But before we digress too far from the original point: You\u2019ll only be taxed more in retirement if you\u2019re spending<\/em> more than you\u2019re earning<\/em> now.<\/strong><\/p>\n

    If you\u2019re like, \u201cOh, I only make $80,000 now, but I plan to live an LLL in retirement: A Large, Lavish Life, baby!\u201d Let\u2019s pump the brakes, L^3.<\/p>\n

    This is the perfect segue to addressing the second piece of pushback: that you\u2019re going to (somehow) be able to afford a crazy luxurious life in retirement that thrusts you into a higher tax bracket.<\/p>\n

    Why you probably won\u2019t be in a higher tax bracket in retirement<\/h2>\n

    It all comes down to this very simple truth:<\/p>\n

    In order to have enough money in retirement to live large, you have to invest a shit ton of money.<\/p>\n

    Why? Because the only way to grow a humongous nest egg (one that\u2019s capable of spinning off large sums of cash in returns annually) is to fill it with a shit ton of cash, and preferably early in life so it has time to compound parabolically (which isn\u2019t impossible<\/em>, to be sure, but certainly on the \u2018unlikely\u2019 side of average when you consider that most people hit their peak earning years between 35 and 44<\/a>).<\/p>\n

    And in order to invest<\/em> a shit ton of money, you have to make<\/em> a shit ton of money (either that, or work for a full 40 years).<\/p>\n

    And what\u2019s true about people who make a shit ton of money?<\/p>\n

    They\u2019re in a high tax bracket<\/em>. <\/p>\n

    The paradox is this: If you\u2019re in a lower tax bracket now, the only way for you to be in a higher tax bracket in retirement is by spending a ton of money after you retire \u2013 but you won\u2019t have a ton of money to spend unless you\u2019re earning (and investing) a lot now. And if you\u2019re earning (and investing) a lot now, you\u2019re likely already<\/em> in a tax bracket that you\u2019ll have a hard time eclipsing with spending later.<\/p>\n

    (Either that, or living on very, very little and investing the healthy majority of an average salary \u2013 and at that rate, behaviorally speaking<\/em>, it\u2019s unlikely you\u2019d even want<\/em> to flip the switch in your golden years and suddenly change your entire lifestyle.)<\/p>\n

    Does your head hurt? Cool. Let\u2019s add some numbers \u2013 that\u2019ll help!<\/p>\n

    The reality of using your 401(k) in retirement<\/h2>\n

    The sad reality is that it\u2019s going to prove nearly impossible to retire on only<\/em> a 401(k). If someone contributed the maximum ($23,500 in today\u2019s dollars, adjusted for inflation every year) to a 401(k) for 25 full years<\/strong> \u2013 it only results in ~$1.6M, assuming average 7% annual returns.<\/p>\n

    $1.6M sounds like a shit ton of money, but after 25 years, the purchasing power of those #dollarz will be a shadow of their former selves.<\/p>\n

    To give you a sense of just how<\/em> shadow-y, the equivalent purchasing power of spending $50,000 today will cost $128,000 in 25 years from now, assuming 3% average annual inflation.<\/p>\n

    Put another way: To live the same type of life that $50,000 buys you today, you\u2019d need $128,000.<\/p>\n

    Since the widely accepted safe withdrawal rate is 4%, in order to support $128,000 in spending money per year, you\u2019d need ($128,000 * 25) $3.2M. <\/p>\n

    There are two (obviously) shitty things about this reality: <\/p>\n

      \n
    1. \n

      Most people are not <\/em>contributing the maximum to their 401(k), and for most Americans, that\u2019s the only<\/em> account they\u2019re contributing to.<\/p>\n<\/li>\n

    2. \n

      Most people are concerned about paying too much in taxes when they\u2019re in retirement or \u201cbeing in a higher tax bracket,\u201d but the reality is that many of us will not be able to afford<\/em> to withdraw enough each year to be in a tax bracket that\u2019s even close to what we\u2019re in now. There\u2019s a reason people believe Millennials are facing a retirement crisis<\/a>.<\/p>\n<\/li>\n<\/ol>\n

      Moral of the story? It pays to know how much your life costs and what it\u2019ll cost to support that life indefinitely. <\/p>\n

      More importantly, it pays to know how you\u2019re (likely) going to earn, and make \u201cTraditional vs. Roth\u201d decisions accordingly. Let\u2019s look at a few different scenarios:<\/p>\n