What you need to know about retirement

The marginal tax rates that we all face during retirement can be extreme and they are not well published. Federal tax “Brackets” are basically the same for all of us while there are literally thousands of different “Marginal” tax rate brackets based on your personal financial situation.

Use the following form to define your marital status, estimated annual Social Security benefit, other taxable income, and personal brokerage investments (if you have any). As you make your changes the chart will interactively change to show you how each option affects your retirement marginal tax rates.

Each chart was created using my downloadable spreadsheet to which I added the green taxes saved line.

Single 20K 25K 30K 35K Yes
Benefit Amount LTCG or QD
Married 40K 50K 60K 70K No
  • The red line indicates the normal tax brackets we are all used to while we are working.
  • The blue line represents the marginal tax rate we pay while receiving Social Security benefits and we will discuss why it has this shape as we continue our discussion.
  • The chart title indicates your maximum tax savings and your final tax savings after 85% of your benefits have been taxed.
  • The solid green line shows your tax savings as income increases.
  • The dotted green line indicates the income levels where the deferral period ends and the 50% and 85% taxability happens.
  • The dotted red line shows how the standard tax brackets are moved due to the deferral of your SS benefits.
  • Note that the income scale remains constant and is merely doubled for a married couple.
  • Note how the blue line moves to the right as your Social Security benefit increases.
  • The green line continues to grow as the blue line moves right and the size of the 46.25% bracket increases because we now have more tax savings to give back.
  • The large "Tax Hump" starts before the 25% bracket when you include Long Term C apital Gains or Qualified Dividends because of the way their deferral period ends.

In general, the larger your Social Security benefit, the more deferred tax income, the more the blue line moves to the right, the higher the green tax savings line gets and the wider the blue tax rate hump gets because you now have more tax savings to give back to the IRS.

Married couples pay taxes on their Social Security benefits earlier so the blue line shifts left, their savings are less so their Tax Hump is smaller, but when the taxes are given back and the green line levels out at the almost same per capita tax savings.

The LTCG and QD tax hump is the same width but it just starts our higher because the additional deferred income has move the start of the blue line further to the right.

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