One objective of tax planning is to limit income taxes paid during one’s lifetime.
To my mind, it is exceedingly difficult to present an entire adult lifetime tax arc in a single projection or spreadsheet. This is for many reasons, including the fact that we don’t know the date of death.
What I think has more analytical validity is looking at a married couple looking to spend the exact same amounts at age 55, age 65, and age 75. From there we can learn lessons about retirement tax planning.
The example I will use is Mike and Julie, married filing jointly.
At age 55, they are both W-2 workers funding their living expenses from salary.
At age 65, they are both retired. Mike and Julie fund their living expenses with sales of taxable brokerage account assets and taxable brokerage account dividends.
At age 75, Mike and Julie fund their living expenses with Social Security, traditional IRA distributions, and taxable brokerage account dividends.
In all three years, Mike and Julie wish to spend $200,000 annually expressed in 2026 dollars. In all three years, they donate $6,000 of the $200,000 to charity.
We’d expect that Mike and Julie generate income in all three years to fund living expenses and thus pay similar income taxes to fund similar levels of spending.
But that is not what happens, as revealed in this summary table:
| Item | Age 55 | Age 65 | Age 75 |
| Total Federal Income Tax Paid | $43,897 | $996 | $26,392 |
| Total Net Investment Income Tax Paid | $646 | $0 | $0 |
| Total Estimated IRMAA in Two Years | $0 | $0 | $0 |
| Total Taxes | $44,543 | $996 | $26,392 |
| Effective Tax Rate | 15.68% | 0.64% | 11.55% |
| Marginal Income Tax Rate (Next Dollar of Ordinary Income) | 24% | 16.8% | 24.64% |
I have posted the entire spreadsheet, including tax calculations, as a PDF available here.
A Few Observations On Taxes During The Age 55 to Age 75 Mini Arc
One could write a book with commentary on these results. I’ll skip the book and instead share a few observations.
Workers Are Taxed More Than Retirees
Notice how much the tax laws favor retirees over workers. This is for a variety of reasons. It’s not any one single rule.
Rules that tend to favor retirees over workers include:
- Senior deduction (for those 65 and older)
- Additional standard deduction (for those 65 and older)
- Basis recovery on capital gain transactions
- 0% long-term capital gains bracket
- Qualified charitable distributions (QCDs) available starting at age 70 ½
- Exclusion of 15 percent to 100 percent of Social Security income
It’s odd that some commentators tell us to fear taxes in retirement when for most Americans, retirement is their largest tax cut.
Traditional IRAs Are Not Bad in Retirement
At age 75, Mike and Julie live, in part, on $139,000 of traditional IRA distributions. Many fear a taxable distribution from a traditional IRA of that size.
It turns out the tax burden is rather light. Here is how that $139,000 distribution is taxed.
| Amount | Federal Income Tax Rate | Federal Income Tax |
| $6,000 | 0% (QCD) | $0 |
| $70,365 | 12% | $8,448 |
| $8,885 | 22% | $1,955 |
| $53,750 | 24.64% | $13,244 |
| Totals $139,000 | Average 17.01% | $23,647 |
Mike and Julie deducted traditional 401(k) contributions at a 24% rate during their working careers. With their only mitigation planning being a $6,000 QCD, they wind up with an effective rate of 17% on their traditional IRA distributions.
Why is a large balance in a traditional IRA something to be feared?
Assuming that the $139,000 distribution is their required minimum distribution (RMD), their IRAs are worth approximately $3.4 million.
That a traditional IRA worth $3.4 million is taxed so lightly is news to most retirees driven to fear of RMDs by personal finance commentary.
I will note that Mike and Julie have a slight inefficiency here. Due to a favorable tax law change, the new senior deduction, Mike and Julie have a 0.64% inefficiency on approximately $54K of the $139K of the traditional IRA distribution. This inefficiency is simply one small tree in the forest of winning against the IRS by deducting 401(k) contributions at work and having the money come back into taxable income in a very tax efficient manner.
Roth Conversions Can Be Beneficial But are Hardly Necessary
Could Mike and Julie benefit from some Roth conversions at age 65? Sure. But they would pay a 16.8% tax on the first dollar of the Roth conversion to avoid taxes on later RMDs that could be, under current tax rules, 24.64%.
You saw that the RMD is relatively lightly taxed. Could the Roth conversion make sense on a spreadsheet? Yes. Is it necessary? Hardly.
Also, consider this: how is Mike and Julie’s money best spent at age 65? On saving 75 year old, 85 year old, and 95 year old Mike and Julie’s taxes? Or on living in the moment and enjoying some life while both are still alive and there is health and energy to enjoy new experiences?
Is tomorrow guaranteed? Hardly. It’s odd that American personal finance often tells retirees in their 60s to prioritize spending money to avoid IRS Garbage Time Touchdowns later in life instead of prioritizing enjoying what is likely to be the best part of retirement, the early part of retirement.
Conclusion
When it comes to tax planning, it’s not about projections. It’s about pattern recognition.
What are the patterns when it comes to taxes in retirement?
Taxes in retirement tend to light. I’ve previously discussed political reasons why that might be (Hint: politicians are likely to keep acting in the politicians’ own best interests).
Tax planning should never be driven by fear. Rather, it should be driven by recognizing the patterns. The patterns indicate retirees tend to be favored when it comes to their income taxes in retirement.
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This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.
It would be very helpful if you could post a similar example, but using a couple who have a sizable pension kicking in during their early 60s. Thanks!
When you talk about Roth Conversions you don’t mention the widow tax which will heavily impact the survivors taxes. Additionally do Roth conversions before 75 doesn’t impact their spending, just shifts the tax earlier on their pretax money (assuming you pay the conversion tax from the conversion)
This article links to my previous post titled The Widow’s Tax Trap and RMDs (the IRS Garbage Time Touchdowns hyperlink). Further, on my YouTube Channel I have done all sorts of Widow’s Tax Trap videos, including illustrations of a widow/single person with a $500K, $1M, $2M, and $5M traditional IRA balance.
How does the example change if at 75 the couple goes from MFJ to filing as single?
Check my Widow’s Tax Trap and RMDs post and the videos I’ve posted to my YouTube channel about taxes in retirement, including single/widowed retirement.
What if the couple has pension income of $50k per year….or $60k….or $70k…..would that change any of the advice.
Let’s be abundantly clear: nothing in this blog post, or any post on my blog, is advice.
Everything provided here is educational information and commentary.
Would a pension potentially change one’s approach to their financial and tax planning? Absolutely.
I didn’t mean to come across as negative. I greatly appreciate your educational information and that you share it openly.
I am genuinely interested in figuring out retirement income and tax planning when a sizable pension is involved. I love the examples that you have provided here and in your book and would really like to see more when pensions are involved.
Thanks for all that you do!
Mike, thanks for your response. I didn’t perceive your comment to be negative, and I’m sorry if my response came off as harsh. Words matter when it comes to financial planners doing a blog. I know you did not mean much by it but based on my day job there is a huge difference between “advice” and “educational information and commentary.”
Holding spending constant across the three ages makes the change in income sources much easier to see. It would be useful to add a sensitivity case with a lower cost basis in the taxable account at age 65, while keeping spending unchanged. That could show readers how much of the low-tax window depends on basis rather than age alone.
Thank you for commenting. I appreciate it.
Lower cost basis? The example has 70 percent of the proceeds as gain and just 30 percent as basis. Even striping away most of that 30 percent basis is going to leave them with quite low federal income taxes.