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Retirement and Taxes

Chris Farrell Jul 11, 2008

Question: Contributing to my 401 now is lowering my tax bracket, but I will have to pay taxes on this $ later. Is there a standard tax bracket in retirement, or does it depend on how much you take from your investments? THANX! Sharon. Henderson, NC

Answer: There’s no standard tax bracket when it comes to retirement. The traditional assumption has been that your tax bracket goes down. After all, you’re no longer working and pulling down a regular pay check.

However, it turns out that some people earn more in retirement than they did while on a payroll. For instance, several years ago I was talking with a group of teachers and their taxes went up during retirement. The reason is that they had saved the maximum for 30-plus years in a retirement savings plan. They had good pensions. A few also made money on the side just to stay engaged and active.

This is the kind of planning question that becomes increasingly real the closer you are to retirement. You’ll also be able to make an educated guess at that point whether your tax bracket will change, or stay the same.

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