Why Your Tax Bracket May Be Higher in Retirement Than You Expected

One of the most common misconception I hear from clients is “My tax bracket will be lower in retirement.”

Someone walks in who has done everything right. They maxed out their 401(k) every year. While saving consistently, they built something real. They own a home. They have a brokerage account, a traditional IRA, maybe a pension. Social Security is coming. They are in a strong place for a comfortable retirement.

And then they retire. And the tax bill doesn’t go down the way they expected.

Sometimes it goes up.

And they want to know why.

Wait, so why is my tax Bracket higher in Retirement?

I understand why so many people have this misconception. You stop working, your income drops, your taxes drop. That’s how it’s supposed to work.

But retirement income doesn’t behave like a paycheck. It doesn’t just stop and restart at a lower level. It layers. And it layers in a way most people don’t see coming until they’re already living it.

Here’s what that actually looks like.

You retire at 65. Income drops significantly. Maybe you have a small pension and some investment income from your portfolio. It’s manageable. Taxes feel reasonable. This is the window people picture when they imagine retirement.

Then 67 arrives. Social Security begins. Depending on your total income, up to 85% of that benefit becomes taxable. The number on your return starts to climb.

Then 73 hits. Required Minimum Distributions begin.

This is where the picture changes.

Required Minimum Distributions (RMDs)

Required Minimum Distributions (RMDs) are the IRS’s way of saying: you’ve deferred taxes long enough. It’s time to start pulling money out of your pre-tax accounts, whether you need it or not, and pay ordinary income tax on every dollar.

What most people don’t realize is that RMDs are designed to grow. The calculation is based on your account balance divided by a life expectancy factor that gets smaller every year. Even if your account stays flat, the required withdrawal increases. If your account grows, the distributions grow even faster.

By age 80, 85, you can be looking at distributions that dwarf what you were earning in your final working years.

The better you saved, the bigger your future tax problem can become.

That’s not a reason not to save. It’s just the reality of how pre-tax accounts work. Every dollar you contributed avoided taxes then. Every dollar that comes out pays taxes now, including decades of growth on top of it.

The ripple effect

Higher taxable income in retirement doesn’t just mean a higher tax bracket. It sets off a chain reaction that touches almost every other part of your financial life.

Medicare premiums

Most people don’t realize Medicare premiums aren’t fixed. If your income crosses certain thresholds, through a surcharge called IRMAA, your Part B and Part D premiums increase.

And here’s the detail that matters most: it’s a cliff, not a slope. One dollar over the threshold and you’re bumped into the next tier for the entire year.

For a married couple, that can mean over $1,000 in additional premiums annually. And it’s per person. Cross the line as a couple and you’re paying that surcharge twice.

Social Security taxation.

The more income you have, the more of your Social Security benefit becomes taxable, up to 85%. As a result, a large RMD doesn’t just get taxed at your marginal rate. It also pulls more Social Security into the taxable column at the same time. Therefore, your effective rate ends up higher than your bracket alone would suggest.

Surviving spouse taxes

When one spouse passes, the survivor moves from filing jointly to filing as a single taxpayer. The same income now sits in a much narrower bracket. What was manageable can become a significant burden almost overnight. This is one reason IRA beneficiary designations deserve as much attention as the accounts themselves.

This isn’t just about taxes today. It’s about lifetime tax strategy.

What this looks like over a lifetime

One of the tools we use with clients is a tax bracket visualizer, a chart that maps projected income across their retirement years, laid against the federal tax brackets.

What it shows is striking every time.

In the late sixties and early seventies, before RMDs begin, before Social Security is fully in play, taxable income tends to sit in the lower brackets. 10%. 12%. It’s low.

Then the bars start climbing. By the mid-eighties, many retirees are sitting in the 22%, 24%, even 32% brackets, not because they’re spending more, but because their income sources keep stacking and their RMDs keep growing.

The question the chart always raises is the one we ask with every client: how do we move some of that income from up there, when the brackets are high and the options are limited, down to here, when there’s still flexibility?

That’s the planning opportunity. And it’s time-sensitive. It’s also one of the core reasons tax planning is something we treat as an ongoing process, not a once-a-year exercise.

How we actually analyze this

Every year, we run each client through a full tax scenario analysis. We model their current situation against one or two alternatives so we can see exactly what each move costs before we make it.

A real-world example

Take a client we'll call Austin. He's retiring in late 2026. In 2024, he earned $130,000 and sat in the 22% marginal bracket. But here's something worth understanding about tax brackets: you don't pay 22% on everything. You pay each rate only on the income within that specific bracket. It's a graduated scale. Austin's effective rate, what he actually paid on his total income, was only 7.3%.

In 2026, his wages drop to $117,000 as he phases into retirement. His marginal bracket falls to 12%. His total federal tax drops from $8,676 to $3,144.

And now a question opens up: is there room to do a Roth conversion this year?

A $10,000 Roth conversion brings his total tax to $5,474, about $2,300 more than without it. He's still in a lower bracket than he was two years ago. And that $10,000, plus every dollar of future growth on it, will never be taxed again. That's the core promise of a Roth IRA: pay the tax now, and let the growth be yours to keep.

We always tell our clients: we've never met a client who was happy about a Roth conversion at tax time. And that's true. Writing a check to the IRS never feels good in the moment. But the question isn't whether it hurts today. The question is whether it costs less now than it will at 80, when RMDs are forcing distributions whether you want them or not.

For many of the clients we work with, it does.

The juggling act for tax in retirement

Roth conversions sound simple, but the amount you convert in any given year affects almost everything else.

Convert too much and you might cross an IRMAA threshold, triggering higher Medicare surcharges for the next two years, since IRMAA looks back at income from two years prior. You might make more of your Social Security taxable. Capital gains may get pushed into a higher rate. You might hand your CPA a headache they weren't expecting.

Sometimes the right answer is $50,000. Sometimes it's $45,000. That $5,000 difference might not sound significant. But if it keeps you below an IRMAA cliff, it might save you more in Medicare premiums than the conversion itself would have cost.

And sometimes, it actually does make sense to accept the higher Medicare premium. Maybe the conversion benefit to your estate, or to your children's tax situation, outweighs the short-term surcharge. That's a real conversation we have with clients. The goal isn't to avoid every cost. The goal is to understand every tradeoff and make the decision with full information.

That requires looking at all of it at once. Not just this year. Every year. This is exactly the kind of analysis we walk through as part of our financial planning process.

the impact on the next generation

There's one more reason Roth conversions have become a bigger part of the planning conversation. And it has nothing to do with the client's own tax bill in retirement.

It has to do with their kids.

When a client leaves a traditional IRA to their children, those children have ten years to withdraw everything and pay income tax on every dollar. This is called the ten-year rule, and it's a relatively recent change that catches families off guard regularly. It's also one reason why keeping IRA beneficiary designations current matters more than most people realize. Who inherits the account is only part of the equation. What they inherit, and in what form, shapes the tax outcome just as much.

Here's what it looks like in practice.

A client has $1 million in a traditional IRA and two children. Each inherits $500,000. The accounts continue to grow. Ten years later, each child has $1 million, and they have to pull it all out, likely right in the middle of their peak earning years. That withdrawal stacks on top of their salary, their spouse's income, their investments. The tax hit can be enormous. Money you spent a lifetime building gets taxed at the highest rate your children will ever pay.

A Roth IRA changes that picture. Inherited Roth accounts still follow the ten-year rule, but the distributions come out tax-free.

For a lot of families, this is the moment the conversion question shifts from a personal decision to a generational one. And it's worth thinking about both.

A Note on California

California offers no special tax exclusions for retirement income. RMDs are taxed as ordinary income at the state level, the same as wages. Social Security is one of the few exceptions; California does not tax Social Security benefits. However, for everything else, pension income, IRA withdrawals, and RMDs, you're paying California's ordinary income tax rates, which reach as high as 13.3%.

For retirees in the Sacramento area and surrounding foothills, this makes the planning conversation even more consequential than the federal picture alone. A strategy that looks efficient on paper at the federal level can look quite different once California is included.

If your tax bill in Retirement surprised you, you're not alone

You didn't make a mistake. You made good decisions for a long time. The tax consequence of those decisions doesn't always announce itself in advance and by the time most people see it, some of the planning window has already closed.

Not all of it. There's almost always something worth looking at, if you start before the decisions are locked in.

Most people reach out because they want to understand whether what they're doing still makes sense. That's exactly the right reason.

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