Tax Rate Planning in Retirement: What Number to Actually Use

The Tax Rate Input That Changes Everything

Every retirement simulator has a tax rate input, and most people get it wrong. They plug in their current marginal rate — 24%, 32%, maybe higher — because that's the number they see on their pay stub or tax return. Then they wonder why their projected retirement spending looks impossibly tight.

Here's the problem: your retirement tax rate is almost certainly lower than your working tax rate. Often dramatically so. The difference between entering 25% and 12% in a retirement simulator can shift your FIRE number by hundreds of thousands of dollars. It can change a failing plan into a comfortable one. Getting this number right is not a minor detail — it's one of the most consequential inputs in your entire retirement model.

In the FIREwiz simulator, the tax rate converts your after-tax spending target into the gross withdrawal your portfolio actually needs to produce. The formula is straightforward: grossWithdrawal = netSpending / (1 - taxRate). At a 25% tax rate, a $60,000 spending target requires $80,000 in withdrawals. At 12%, that same $60,000 only needs $68,182. Over 30 years, that $12,000 annual difference compounds into a massive gap in portfolio survival.

Marginal vs. Effective: The Rate That Actually Matters

This is where most people go wrong. Your marginal tax rate is the rate on your last dollar of income. Your effective tax rate is the blended rate across all your income, including dollars taxed at 0% (the standard deduction), 10%, 12%, and so on. For retirement planning, you almost always want the effective rate.

In 2026, a single filer gets a $15,000 standard deduction. The first $11,925 of taxable income is taxed at 10%. The next chunk up to $48,475 is taxed at 12%. Only income above $48,475 hits the 22% bracket. So even if your marginal rate is 22%, your effective rate on $60,000 of total income is closer to 12%. The standard deduction alone shelters a quarter of that income from any tax at all.

Notice the pattern. Even at $100,000 in withdrawals, the effective federal rate is only about 17%. That's because so much of the income passes through the 0%, 10%, and 12% brackets before hitting higher rates. If you've been using your marginal rate of 22% or 24% in your retirement projections, you've been systematically overstating how much your portfolio needs to produce.

Account Type Changes Everything

Your tax rate in retirement depends enormously on where your money is invested. Not all retirement dollars are created equal, and the account mix you build during your working years determines the tax treatment of every dollar you withdraw later.

Traditional IRA and 401(k): Every dollar withdrawn is taxed as ordinary income. If your entire portfolio is in traditional accounts, your effective tax rate applies to your full withdrawal amount. This is the simplest case but also the highest-tax scenario for most retirees.

Roth IRA and Roth 401(k): Withdrawals are completely tax-free (assuming you've met the five-year rule and age requirements, or are withdrawing contributions). If you've built a substantial Roth balance, either through direct contributions or a Roth conversion ladder, the tax rate on those withdrawals is literally 0%.

Taxable brokerage accounts: Long-term capital gains and qualified dividends are taxed at preferential rates — 0% for taxable income up to $48,475 (single) or $96,950 (married), 15% for most people above that, and 20% only at very high incomes. Many early retirees with moderate spending fall entirely within the 0% capital gains bracket.

A mix of accounts: This is where most people actually land, and it's where strategic withdrawal ordering can dramatically reduce your blended rate. Pull from Roth accounts for spending that would push you into a higher bracket. Use traditional withdrawals to fill the lowest brackets. Take capital gains in years when your income is low enough for the 0% rate.

The difference is striking. An all-traditional retiree withdrawing $80,000 pays roughly 15% in federal taxes. A retiree with a 50/50 split between traditional and Roth accounts pays closer to 8%, because only half the spending triggers taxable income and that half benefits from the lower brackets. An all-Roth retiree pays nothing at the federal level.

Don't Forget State Taxes

Federal taxes are only part of the picture. State income taxes can add anywhere from 0% to over 13% on top of your federal rate, and many retirees overlook them entirely when estimating their tax burden.

Seven states have no income tax at all: Texas, Florida, Nevada, Wyoming, South Dakota, Alaska, and Washington. If you live in one of these states, your effective rate is purely federal. But if you retire in California, New York, Oregon, or Minnesota, state taxes can add 8% to 13% to your effective rate. That's not trivial. A retiree with a 12% effective federal rate living in California might face a combined rate of 18% to 20%.

Some states exempt certain retirement income. Several don't tax Social Security benefits. A few offer deductions for pension or IRA income. These details matter and they vary enough that a blanket rule won't work. Look up your specific state's treatment of retirement income and add that rate to your federal effective rate.

When entering your tax rate into the FIREwiz simulator, use your combined federal plus state effective rate. If your federal effective rate is 12% and your state adds 5%, enter 17%.

Common Mistakes That Skew Your Projections

After working with thousands of retirement simulations, these are the errors that show up most often:

• Using your marginal rate instead of your effective rate. This is the most common mistake. A 24% marginal rate with a 14% effective rate means you're overstating taxes by 70%. Every dollar of that overstatement forces your portfolio to work harder than it needs to.
• Forgetting state taxes entirely. If you live in a state with income tax, ignoring it means your projections understate withdrawals. A 5% state tax on $80,000 in withdrawals is $4,000 per year that has to come from somewhere.
• Ignoring Roth accounts in your tax estimate. If 40% of your retirement savings are in Roth accounts, those withdrawals are tax-free. Your effective rate on total spending is lower than the rate on just your traditional withdrawals. Adjust accordingly.
• Assuming your tax rate stays constant. Required Minimum Distributions starting at age 73 can push retirees into higher brackets. Social Security income is partially taxable. Your rate in year one of retirement may differ from your rate in year 20. Use a mid-range estimate that accounts for this evolution.

How to Estimate Your Number: A Walkthrough

Here's a practical approach to calculating the tax rate you should enter into a retirement simulator. A tax professional or H&R Block can help you refine these numbers, but this gets you to a reasonable starting estimate.

Step 1: Estimate your gross withdrawals by account type. Say you need $70,000 in annual spending. If you plan to pull $40,000 from traditional accounts and $30,000 from Roth accounts, only the $40,000 is taxable income.

Step 2: Calculate federal tax on the taxable portion. Take your $40,000 in traditional withdrawals. Subtract the standard deduction ($15,000 for single filers). That leaves $25,000 in taxable income. The first $11,925 is taxed at 10% ($1,193). The remaining $13,075 is taxed at 12% ($1,569). Total federal tax: roughly $2,762.

Step 3: Add state tax. If your state charges 5% on that $40,000 (with its own deductions), you might owe another $1,500 in state tax. Total tax: about $4,262.

Step 4: Calculate your effective rate on total spending. Divide total tax by total spending: $4,262 / $70,000 = 6.1%. That's your blended effective rate — dramatically lower than the 22% marginal bracket you might have assumed.

Enter this blended rate into the simulator. For most people with a mix of account types and moderate spending, the right number falls somewhere between 5% and 18%.

Roth Conversions: Lowering Your Future Rate Today

If your effective tax rate looks higher than you'd like, a Roth conversion strategy can help. By converting traditional IRA money to Roth during low-income years (either in early retirement or during career breaks), you pay tax at today's low effective rate and permanently shift that money into the tax-free column.

This is especially powerful in the years between early retirement and when Social Security or Required Minimum Distributions kick in. During that window, your taxable income may be near zero. Converting just enough to fill the 10% and 12% brackets each year gradually moves your traditional balance into Roth, reducing both your future tax rate and your exposure to the higher brackets that RMDs might force you into.

Think of it as tax rate arbitrage. You pay a small amount now to avoid a larger amount later. The net effect is a lower lifetime tax burden and a lower rate to enter into your retirement projections going forward.

How FIREwiz Uses Your Tax Rate

In the FIREwiz simulator, the tax rate input serves a specific purpose: it converts your after-tax spending target into the gross portfolio withdrawal needed each year. The formula is grossWithdrawal = netSpending / (1 - taxRate). This gross amount is what gets deducted from your portfolio balance in the simulation.

This means the tax rate directly affects your required portfolio size and your success rate across simulated scenarios. A higher tax rate means larger withdrawals, faster portfolio depletion, and lower success rates. A more accurate (usually lower) tax rate gives you a realistic picture of how your portfolio actually needs to perform.

The simulator doesn't model individual tax brackets, account types, or state-specific rules — that level of complexity belongs in dedicated tax software. Instead, it asks you for one blended number that represents your best estimate of the overall tax drag on your retirement withdrawals. The more accurately you estimate that number using the approach above, the more useful the simulation results will be.

Track your complete financial picture — investments, spending, and tax-advantaged accounts — with Empower's free dashboard to keep your retirement projections grounded in real data.

Get Your Number Right, Then Simulate

Tax planning is not the most exciting part of retirement planning, but getting it wrong is one of the easiest ways to distort your projections. A tax rate that's off by 10 percentage points can make a sustainable plan look doomed or a risky plan look safe.

Take 20 minutes to walk through the estimation steps above. Look at your actual account balances and figure out the rough split between traditional, Roth, and taxable. Calculate your expected taxable income in retirement. Run the numbers through the federal brackets and add your state rate. The result will almost certainly be lower than the rate you've been using.

Then plug that number into the FIREwiz retirement simulator and see how it changes your outlook. You might find that retirement is closer than you thought.