Can I Retire? Series — Part 10 of 12
Here’s a retirement planning mistake that costs people thousands of dollars: pretending taxes don’t exist.
Most calculators ask for your portfolio balance and your desired spending, then run the math as if every dollar you withdraw lands in your pocket. It doesn’t. The IRS takes a cut — sometimes a big one.
If you need $60,000 to live on and you’re pulling from a traditional 401(k), you might need to withdraw $72,000 or more to net that amount after taxes. That’s a 20% difference. Over a 30-year retirement, ignoring taxes could mean running out of money years earlier than you expected.
The calculator on caniretire.app doesn’t pretend taxes away. It models them.
How the Calculator Handles Taxes
The calculator models the actual U.S. tax system:
Federal income tax brackets. The 2024 brackets are built in: 10%, 12%, 22%, 24%, 32%, 35%, 37%. When you withdraw from traditional accounts, that income flows through these brackets just like a paycheck would.
Standard deduction. The first chunk of income is tax-free. For 2024, that’s $14,600 for single filers and $29,200 for married filing jointly. The calculator applies this automatically.
Capital gains treatment. Withdrawals from taxable accounts aren’t taxed like ordinary income. Only the gains are taxed, and at preferential long-term capital gains rates (0%, 15%, or 20% depending on income). The calculator tracks this separately.
State taxes. You can input your state tax rate. This matters — the difference between Texas (0%) and California (up to 13.3%) is substantial.
Roth withdrawals. Tax-free. The calculator knows this and doesn’t apply any tax when pulling from Roth accounts.
The Gross-Up Problem
Here’s the math that trips people up.
You need $60,000 to cover your expenses. You’re withdrawing from a traditional IRA. After the standard deduction, let’s say your effective federal tax rate is 15%, plus 5% state tax — 20% total.
If you withdraw $60,000, you’ll pay $12,000 in taxes and have $48,000 left. That’s not enough.
To net $60,000, you need to withdraw $75,000. The extra $15,000 covers the tax bill on the full withdrawal.
This is called “grossing up” — calculating the pre-tax amount needed to hit a post-tax target. The calculator does this automatically. When you enter your spending, it figures out how much you actually need to withdraw from each account type to meet that spending after taxes.
Why Account Type Matters
The tax treatment of your withdrawal depends entirely on which bucket it comes from:
Traditional accounts (401k, IRA): Every dollar withdrawn is taxed as ordinary income. $50,000 withdrawal = $50,000 added to your taxable income.
Roth accounts: Nothing is taxed. $50,000 withdrawal = $0 added to taxable income. You already paid taxes when you contributed.
Taxable brokerage accounts: Only the gains are taxed, not the original contributions. If you withdraw $50,000 and $20,000 of that is gains, you pay capital gains tax on $20,000. The $30,000 that was your original investment comes out tax-free.
This is why $1 million in a Roth is worth more than $1 million in a traditional account. The Roth million is all yours. The traditional million might be $750,000 after taxes.
RMDs and the Tax Time Bomb
We touched on Required Minimum Distributions in Part 8, but they deserve more attention here because they’re fundamentally a tax issue.
Starting at age 73, the IRS requires you to withdraw a minimum amount from traditional retirement accounts each year. The percentage starts around 3.8% and increases as you age. You can’t leave the money to grow tax-deferred forever.
The calculator implements the full RMD table. When you hit 73, it calculates your required distribution based on your traditional account balance and forces that withdrawal — whether you need the money or not.
Here’s where it gets painful: if your traditional accounts have grown large, your RMDs can push you into higher tax brackets. A $2 million traditional IRA at age 73 requires an RMD of roughly $76,000. Add Social Security, and you might be looking at $110,000+ in taxable income — well into the 22% or even 24% bracket.
Worse, high income can trigger IRMAA — Income-Related Monthly Adjustment Amounts — which increases your Medicare premiums. It can also make more of your Social Security benefits taxable (up to 85%).
The calculator models all of this. When it shows your success rate and ending balance, taxes and RMDs are already factored in.
Tax Planning Opportunities
Understanding taxes creates opportunities:
Fill up low brackets intentionally. If you’re in early retirement with low income, withdraw from traditional accounts or do Roth conversions to “fill up” the 10% and 12% brackets. Pay taxes now while they’re cheap.
Use Roth in high-income years. If you need extra money for a big expense, pull from Roth instead of traditional. It won’t add to your taxable income or push you into a higher bracket.
Harvest capital gains at 0%. If your taxable income is low enough (roughly under $89,250 for married couples in 2024), long-term capital gains are taxed at 0%. You can sell appreciated investments and pay no tax on the gains.
Manage income around ACA thresholds. If you retire before Medicare eligibility and buy insurance through the ACA marketplace, your premium subsidies depend on income. Keeping income below certain thresholds can save thousands in healthcare costs.
These strategies require attention and planning, but they can save substantial money over a long retirement.
Your Homework
Look at your bucket balances from Part 5 again. Consider the tax implications:
If most of your money is in traditional accounts, think about what your RMDs will look like at 73. Run the calculator and pay attention to how taxes affect your success rate versus a scenario where you’ve done Roth conversions earlier.
If you have significant taxable accounts, you might have more flexibility than you realized — especially for early retirement years before Social Security starts.
In Part 11, we’ll stress-test your plan further: what if the market crashes in year one? What if you live to 100? What if inflation runs hot for a decade? Building margin into your plan is what separates comfortable retirements from anxious ones.
Next: Part 11 — Stress Testing Your Plan
