Why retirement income is often taxed more than expected
Most people look at their income and pick a bracket. But in retirement, several things stack on top of each other — RMDs are fully taxable, Social Security can become 85% taxable, and pension income adds to the pile. The marginal bracket looks manageable until you add it all up.
The Roth difference
Roth withdrawals don't count as taxable income, don't push Social Security into a higher taxable percentage, and don't affect Medicare premium surcharges. That's why a dollar of Roth income in retirement is worth more than a dollar of IRA income after tax.
Marginal rate vs. effective rate
Your marginal rate is the rate on your last dollar of income. Your effective rate is what you actually pay across all your income combined. In retirement planning, the effective rate is the more useful number — it's what determines your real after-tax income.
If your estimated effective rate in retirement is higher than your current marginal rate today, that's a signal that Roth conversions now could save you money over the long run.
See how your RMDs will affect this bracket with our RMD calculator. Model the tax cost of a Roth conversion now with our Roth conversion estimator.