The bigger your retirement account withdrawals, the higher your tax bracket will be in retirement. The good news is that you may owe fewer taxes in retirement than when you were in the workforce. There are no Social Security payroll deductions from your retirement account withdrawals. Everyone should have a plan to mitigate the tax hit on their retirement income streams.
How Many Tax Brackets And Rates Are There?
There are currently seven federal tax brackets. As you earn more money, you will move into higher tax brackets and owe more taxes on the next dollar earned. Current federal tax rates range from 10% to 37%. The tax bracket that you fall into will depend on your household taxable income and marital status.
The taxes you will owe at the state level will depend on where you live, your total income and your marital status.
Can You Change Tax Brackets After You Have Retired?
Yes, you can change your tax brackets after you retire. You may even change them from year to year.
You should also know that the income that falls into each tax bracket changes from year to year. However, without some tax policy change, the tax rates assigned to each tax bracket don’t change as often. We are in an election year, and who is elected as our next president and members of congresss will likely determine the taxes you are paying on income in future years.
Will Retirement Account Withdrawals During Pre-Retirement Affect Your Tax Bracket?
Our tax system is progressive, meaning the more you earn, the higher the tax bracket your last dollar of income will fall into. So, taking taxable distributions during pre-retirement from your retirement account will likely mean paying taxes at higher rates than if you waited until retirement.
Also, you should know that withdrawals from accounts like a 401(k) or IRA before age 59.5 are typically subject to an additional 10% early withdrawal penalty. This is on top of the taxes due on the withdrawals.
