Will You Really Be in a Lower Tax Bracket in Retirement?

By Craig Brooks, RICP®, AIF® — Founder of Future Capital Management

Written: July 25, 2025
Updated: August 1, 2025

Introduction

For decades, a common assumption has shaped retirement planning: retirees will generally fall into lower marginal tax brackets once employment income ends. This belief supports the logic of making Traditional IRA contributions—take the tax deduction today and pay taxes later, ideally at a lower rate.

Yet this assumption is under growing strain—not only from evolving tax laws, but also from the broader fiscal environment of persistent deficits and rising federal debt. With the passage of the One Big Beautiful Bill (OBBB, July 2025), many provisions of the 2017 Tax Cuts and Jobs Act (TCJA) have been made permanent. While this stabilizes part of the tax landscape, it doesn’t eliminate long-term policy risks.

This paper explores both dimensions: (1) why the “lower bracket” assumption may not hold, (2) how the OBBB reshapes near-term tax planning, (3) the nation’s broader fiscal pressures and their implications, and (4) what it all means for choosing between Roth vs. Traditional IRAs.

The Traditional Assumption: Lower Income, Lower Taxes

The idea of retirees naturally falling into lower tax brackets persists for good reasons:

• Reduced work-related expenses (e.g., commuting, professional costs).
• Mortgages often paid off.
• Income sources may shift to Social Security, modest withdrawals, or part-time work.

In this scenario, a Traditional IRA deduction seems attractive. But reality often looks different.

When the Assumption Breaks Down

Several factors complicate the picture:

• Required Minimum Distributions (RMDs): Larger account balances can push taxable income up in retirement.
• Multiple income sources: Social Security, pensions, annuities, and investments can stack up—and interact with Medicare surcharges or tax thresholds.
• Lifestyle choices: Many retirees spend more, not less—especially early in retirement.
• Policy risk: Even if income falls, marginal tax rates can change with legislation.

Thus, while some retirees enjoy lower effective tax rates, it’s not a reliable guarantee.

The Tax Landscape: From TCJA to the One Big Beautiful Bill

• TCJA (2017): Lowered rates, doubled the standard deduction, capped SALT deductions, and removed personal exemptions. Its individual provisions were set to sunset in 2025.
• OBBB (2025): Permanently extends most TCJA cuts, raises the SALT cap to ,000 for some taxpayers, introduces a temporary senior deduction (up to ,000), and phases out some clean energy credits.

The permanence of lower rates reduces short-term uncertainty. But “permanent” is not the same as “unchangeable”—future Congresses may still revise the code.

The Fiscal Backdrop: Deficits, Debt, and Policy Risk

Beyond formal tax law, the fiscal environment matters. The U.S. continues to operate with large and growing deficits. In Fiscal Year 2024, spending reached .75 trillion while revenue totaled .92 trillion, creating a .83 trillion deficit. Debt levels climb daily, with interest costs now a significant share of the budget.

Political polarization further complicates fiscal discipline. With entitlement programs and defense spending difficult to cut, policymakers may increasingly look to marginal tax rates as the “path of least resistance” to close budget gaps.

For retirees, this means tax assumptions are more vulnerable to shifts in policy than ever before. While the OBBB provides near-term clarity, long-term fiscal pressures may push rates higher—especially for higher-income households and large retirement account distributions.

Roth vs. Traditional: What It Means Today

Taken together, the new tax law and the fiscal outlook suggest several key takeaways:

1. Traditional IRA Value Still Exists: The upfront deduction is useful, especially for high earners in their peak income years.
2. Roth IRA Value is Strengthened: Paying known rates today may be attractive if tomorrow’s rates rise. Roth withdrawals in retirement provide tax-free income, shielding against policy shifts.
3. Hybrid Strategies Are Often Best: Building both Roth and Traditional balances provides flexibility. Retirees can draw from each depending on future tax conditions.
4. High-Savings Households Face Greater Risk: Larger RMDs and exposure to potential surtaxes make Roth strategies particularly relevant.
5. Younger Savers May Benefit Most from Roth: With longer horizons, tax-free growth and flexibility compound in value.

A Balanced Approach

Given the unpredictability of both tax law and fiscal politics, tax diversification is often the most prudent course:

• Use Traditional accounts to capture immediate deductions.
• Build Roth accounts for flexibility and protection against future tax increases.
• Consider employer Roth options for higher contribution limits.

Just as diversifying investments mitigates market risk, diversifying across tax treatments helps manage uncertainty in retirement income planning.

Conclusion

The assumption of lower retirement tax brackets is less certain than ever. The OBBB has stabilized near-term rates, but the nation’s long-term fiscal trajectory raises the likelihood of future tax increases.

For many investors, the best approach is not an either/or choice, but a hybrid strategy that balances today’s deductions with tomorrow’s flexibility. By building both Roth and Traditional accounts, retirees equip themselves to navigate whatever tax environment the future brings.

Future Capital Management | 720.927.3100 | www.futurecapitalco.com | info@futurecapitalco.com

This material is for informational and educational purposes only. It should not be construed as investment advice. Please consult with a qualified financial professional before making any investment decisions.

Future Capital Management Incorporated (FCM) is a registered investment advisor in the states of Colorado, Texas, Nebraska, Kansas, Florida and Missouri. Past performance is not indicative of future results.