A brief summary

During retirement your income faces multiple levels of federal taxation. Each dollar is taxed at your federal tax bracket (green taxes). Each additional dollar of income can also make a portion of your previously tax deferred Social Security benefit taxable (red taxes). The combination of your actual dollar of income plus the now taxable Social Security benefit determines how much of your deferred dividend income also becomes taxable (blue taxes).

Unfortunately, these excessive taxation levels occur at relatively moderate income levels. By the time you reach higher income levels 85% of your Social Security has already been taxed and you return to normal tax brackets. This chart is based on a $30,000 Social Security benefit and $4,000 of dividend income and the parallel levels of taxation occur between about $43,000 and $75,000, not exactly what you would think of as “rich”.

The most notable consequence of taxation during retirement is the cost of money. Since the primary source of spendable dollars will most likely be taxable withdrawals from your 401K or IRA, the size of that withdraw will be dependent on your tax levels. If you need an extra $1,000 to pay for an unexpected expense, how much do you have to withdraw from your IRA? As shown in this chart, the cost of money can be extreme depending on the deferred taxability level of your Social Security benefits, deferred taxation of your dividends, your state and local taxes, and if your state also taxes your Social Security. In the worse case, you need to withdraw almost $3.50 for each dollar you need to spend! Avoiding these ridiculous rates should be the goal of all retirees.

One way to solve this problem by having a Roth account as a source of additional tax free income.

Single 20K 25K 30K 35K Yes
Benefit Amount LTCG or QD
Married 40K 50K 60K 70K No

Getting a reasonable picture of tax rates that you will personally face during your retirement is not an easy task. There are literally thousands of different graphs of what those tax rates are.

Use this copy of the form / graphs from the “Your Benefits” page to get an initial picture of what you might be facing.

Each graph is primarily dependent on the size of your Social Security benefit. Married couples pay their extra taxes earlier, and note how dividends create the highest tax levels, but also increase your tax savings if you can avoid those huge taxes.

"What If" the tax laws change?

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