Can withdrawals from retirement accounts affect the tax bracket into which you fall? Whether income from retirement account withdrawals can push you into a higher tax bracket depends entirely on the type of account. Any income you earn after retirement from part-time employment or rental properties is still fully taxable at your normal income tax rate. However, if the bulk of your income comes from retirement savings accounts, such as 401(k) or individual retirement accounts (IRAs), your tax bracket may be lower than you think.

Traditional Accounts

Traditional 401(k) and IRA accounts are funded with pretax dollars. This means you deferred paying income taxes on the portion of your earnings you directed to that account while you were working. Instead of paying income taxes on your full paycheck in the year it was earned, the Internal Revenue Service (IRS) allows traditional account participants to defer taxation until the money is withdrawn. This is a great tool for those who think they will be in lower tax brackets after retirement. However, because you have not yet paid income tax on those funds, any withdrawals you make from a traditional account must be included in your taxable income for that year and may push you into a higher bracket.

Roth Accounts

The debate about which type of retirement account is preferable, traditional or Roth, is ongoing. The upfront tax benefits of traditional accounts notwithstanding, a Roth account can help you keep your taxes low after retirement. This is because Roth accounts are funded with after-tax dollars. You pay income taxes on the full amount of your earnings during your working years, but all your contributions and any interest earned on them are tax free upon withdrawal. This means if you want to spend $100,000 in a given year and have that amount or more in a Roth account, your entire withdrawal for the year is tax free.

There are some stipulations for tax-free Roth withdrawals. For your distributions to be completely tax free, you must be at least 59½ years old and have held the account for at least five years prior to your first withdrawal. If you do not meet these requirements, the total amount of your previous contributions is still tax free, as you cannot be taxed twice on those dollars, but any interest earnings you withdraw are taxed at your normal income tax rate and may incur an additional 10% penalty

Tax Brackets for 2019 and 2020

For 2019 the tax bracket requirements were once again revised by the IRS. Assuming you file as single, the lowest 10% tax bracket applies if your income is below $9,700. If you earn more than this, up to $39,475, your taxable income is subject to the 12% rate. Tax rates jump to 22% for those earning between $39,476 and $84,200. The upper limit for the 24% bracket is $160,725, the 32% bracket tops out at $204,100, the 35% bracket goes to $510,301, and the 37% bracket is for those who earn more than $510,301. Double the amounts for married couples filing jointly.

For 2020 those upper bracket limits for single filers increase to $9,875 for the 10% bracket, $40,125 for the 12% bracket, $85,525 for the 22% bracket, $163,300 for the 24% bracket, $207,350 for the 32% bracket, and $518,400 for the 35% bracket. Those earning above $518,400 pay 37% in taxes.

As most analysts estimate retirees only need 80% of their working years’ income to live comfortably, using a Roth account alone or in conjunction with a traditional 401(k) or IRA may be the key to keeping your tax bill low. If you have both types of accounts, limit your traditional account withdrawals to the amount that keeps you in a lower tax bracket and then supplement that income with Roth funds.