Most people think they know which tax bracket they will land in when they retire. They add up their Social Security, pension, and account withdrawals, spot a number, and assume their tax bill is settled. In reality, a misunderstanding about how tax brackets actually function causes many retirees to make costly decisions based on the wrong rate entirely. That confusion often leads people to believe they are in the 22% bracket when they are actually sitting comfortably at 12%.
The Tax Cliff Myth Versus the Staircase
I have sat down with hundreds of families helping them prepare for retirement, and one of the most common mistakes I see is believing that tax brackets work like a cliff. People often assume that if their total income touches the 22% bracket, every single dollar they made gets taxed at that 22% rate. That belief freezes people in place. They worry that taking one extra dollar out of their account will trigger a massive tax bill across their entire nest egg.
That cliff assumption is completely wrong. Tax brackets operate like a staircase, not a cliff. For a married couple filing jointly, the first $25,000 of taxable income is taxed at 10%, which comes out to $2,500. The next block of income, from $25,000 up to $100,000, is taxed at 12%, which adds roughly $9,000 in tax. Only the dollars that climb above $100,000 enter the 22% bracket.
When you understand the staircase, the math changes dramatically. Someone with $150,000 of taxable income who believes the cliff myth expects to pay $33,000 in federal taxes. Under the actual progressive brackets, that tax bill is closer to $22,500. That is a difference of over $10,000 in perceived taxes. Knowing the difference between your marginal rate on the next dollar and your effective rate across all your income is the foundation of smart tax planning.
The Step Most People Skip: The Standard Deduction
Even after folks understand that brackets work like stairs, they frequently skip a critical step when estimating their taxable income. They total their gross income from pensions, Social Security, and distributions, see that the top number crosses $100,000, and immediately assume they are paying 22% on those upper dollars. They forget that the IRS gives them a substantial deduction before any tax bracket applies.
For a married couple filing jointly, the standard deduction is $32,200. While some households still itemize, roughly 80% of taxpayers now take the standard deduction because it is so large. That single deduction completely reshapes your taxable baseline.
Take a couple bringing in $132,000 of total income. Without factoring in deductions, they assume their top $32,000 is getting hit at the 22% rate. Once you apply the $32,200 standard deduction, their taxable income drops below $100,000. That puts them squarely inside the 12% bracket with room to spare. Forgetting that step causes people to rule out Roth conversions or avoid strategic withdrawals they could easily afford to make.
How a 60-Day Delay Saved One Family $2,500
These tax concepts have real dollar consequences in retirement. A couple I worked with wanted to complete a $25,000 kitchen remodel during their first year of retirement. With a standard advisor, they likely would have called, asked for a $25,000 distribution from their IRA, received the check, and thought nothing more of it.
Because we look at the full picture, we paused to review their tax map for that calendar year. One spouse had worked the first six months of the year before retiring. Adding that final paycheck income to their standard deduction put them right at the top edge of the 12% bracket. Withdrawing $25,000 in December would have pushed that entire remodel straight into the 22% bracket, triggering $5,500 in tax.
Instead, we recommended waiting less than 60 days until January. Our multi-year tax projections showed that in the following year, with both spouses fully retired, they would have plenty of room in the 12% bracket. We distributed the funds in January, paying 12% on the withdrawal for a tax bill of $3,000. That simple 60-day adjustment saved that family $2,500 in cash on a single purchase. When you apply that proactive thinking across Roth conversions, Social Security timing, and account withdrawal order, the cumulative savings over a twenty-year retirement can be substantial.
Key Takeaway
Tax brackets are a staircase rather than a cliff, and your standard deduction significantly reduces the income exposed to those brackets. Misunderstanding your actual tax bracket causes unnecessary fear and leads to expensive timing mistakes on withdrawals and conversions. Proactive tax planning is about knowing exactly which bracket your dollars will land in before you take them out.
If you are approaching retirement or already retired, understanding how your withdrawals interact with tax brackets can keep thousands of dollars in your pocket rather than sending them to the IRS. In a Retirement Review, we map out your forward-looking tax brackets across the next five, ten, and twenty years so you can make informed withdrawal decisions with confidence.
Most retirement mistakes come from blind spots people never knew to look for. A Retirement Review is designed to find yours.
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Full Script
Most people think they know what tax bracket they’re going to be in when they retire. They add up their income, Social Security, maybe pensions, withdrawals from investment accounts. They find their number and they think they’re done. Well, today what I want to show you is a common mistake people often make about how they understand how tax brackets really work.
And then what I’m going to show you is a common step that people often skip, which also leads to a misunderstanding about their real tax bill and their taxable income. That can make the difference of thinking you’re in a 22% tax bracket and then making decisions based off of that, but you’re really in a 12% bracket. This is a really big one to understand.
Then the last thing I’m going to show you is a real case study where we could save a family $2,500 in a year from a big purchase. For example, in this particular case, a kitchen remodel, and how understanding the brackets helps shift the thinking and save them a considerable amount of money. I’m Carl Woolston, founder of Thrive Retirement Planning. My goal is to help you transform the way you retire, so here we go.
So before we get into the common myth that people have about tax brackets, and before we jump into the common misunderstandings and the step they often forget to take when they’re figuring out their taxable income, and then also before we get into the case study, what I want to talk about, just go through the brackets just briefly. The tax brackets when you pull them up online, and these are the 2026 brackets. So if you’re watching this in 2027, these would have slightly adjusted. But the things we’re talking about today are still applicable.
So you can see the various brackets on the side: 10, 12, 22, 24, and beyond. We’re going to be talking about mostly married filing jointly today in our examples. But if you’re a single filer, you can certainly apply these principles to your single filer brackets. So let’s just take a look at 10, 12, and 22 briefly. So you can see zero to 25 is the 10% bracket. 12% is 25 to 100, and then 22 is 100 to 211. So how do we look at these? How do we interpret these? Let’s get into it.
A common mistake people make, and I’ve sat down with hundreds of families helping them prepare for retirement, a common mistake is believing that this is cliff tax, meaning that if you’re in the 22% bracket, all of your money gets taxed at that new 22% that you’re in. And so people will say, “Oh, it’s going to bump me from the 12 to the 22.” They won’t make any decisions and they’ll be frozen because they don’t want all their money taxed at 22%. So we need to get rid of this myth, and it’s called the cliff assumption that all of that is just all of a sudden going to be at 22%. So you can see 150,000 times 22%, that’s $33,000 in taxes. And this assumption is wrong. It’s not accurate.
The real way that you want to look at this is thinking about brackets as a staircase. And so when you look at this, that first $25,000 of income, for married filing jointly, is going to be taxed at 10%. So that’s around $2,500. Then the next batch of money you might call it, or the next bracket, is anything from 25,000 up to 100,000 is going to be taxed at 12%. That’s around $75,000 of income that could be included in that, which is around $9,000.
Now, then anything above $100,000, in this case we’re using up to 150, that $49,200 would be taxed at almost 11,000. See, you add all this up and instead of the $33,000 someone thought they were going to be paying when they believe the myth of a cliff, well, in a staircase, they know that they’re going to be paying $22,500. So $10,000 difference. Huge concept just to fundamentally understand about brackets.
Now, another key concept here in the bottom left is to understand that we’re talking about effective rates versus marginal rates. In the case that we’re looking at, the marginal rate is 22%, meaning anything that they now withdraw from their IRA, say they wanted to pull another $10,000 out of an IRA, that would be taxed 22%. Versus the effective rate takes their total taxable income and figures out how much total, what percent total are they paying, and really they’re only paying just under 15%.
Now I use “only” relative, right? No one wants to pay too much towards tax. Most people I sit down with are willing to pay their fair share, but they don’t want to donate large extra sums to the government. So understanding how this works helps you make decisions, and that’s where I want to go next.
So the step that most people skip is they add up their income, and let’s say they understand now that it’s steps, that it’s not a cliff. Okay, great, we have a good foundation. Now the next part is understanding there’s above-the-line deductions and below-the-line deductions, and this video is not going to go that complex. There’s other videos on the internet. What I want to talk about is just the key step a lot of people miss.
So they add up all that income, right? They see they have some paying 10, some paying 12, some paying 22%, but they forget that there is a standard deduction at the end. And that standard deduction will differ if you’re below 65 or above. I’m just going to take the general numbers here. So, married filing jointly, standard deduction in 2026 is $32,200. That will adjust every year slightly as well.
So what you actually do in this case, this case study is just looking at someone with $132,000 of income. And they’re saying, “Hey, yeah, that 100 to 132, all that money is going to be taxed 22%.” But meanwhile, they forgot to apply a standard deduction. Now, I know some people are going to take the itemized deduction, but 80% of people nowadays are taking the standard deduction because it’s so much larger than it used to be.
So that person is thinking, “Hey, I have all that money above 100,000, that’s going to be taxed 22%,” but in reality, what’s going to happen is you take the standard deduction from that 132, and you’re going to be down under 100,000. So you’re really sitting right at the top of the 12% bracket. That’s helpful with Roth conversions and withdrawals and all sorts of tax strategies when you understand that standard deduction. Someone, for example, might say, “Oh, I can’t do a Roth conversion or I can’t do something else because I’m going to be in the next bracket,” but they forget to take that standard deduction.
So now I want to end with a case study. There’s a real client that had been a client for several years. We helped them the year of retirement. They wanted to do a kitchen remodel. For that kitchen remodel, they wanted around $25,000 out of their accounts. That was the after-tax amount they wanted. So what a typical individual or maybe even somebody working with a typical advisor would do: they call the advisor, they say, “Hey, send me this much money,” and they say great, they send you the money.
Well, we dug a little deeper and just said, “Hey, before we do that, this is a big decision. Let’s just take a closer look at your tax bracket for the year,” because they had worked half the year. And we added those up, and with the standard deduction, they were sitting right at the top of the 12% bracket, which told us that any money they were going to withdraw for this kitchen remodel would be taxed at 22%, which you can see would be $5,500 in tax that they would owe.
Now, what we did instead is said, “Hey, can we just wait for less than 60 days to the beginning of the year, and we’ll send you your money?” And what we did is send them the money right at the beginning of the next year, when we had done a tax map looking forward at the next year and five years and ten years and even 20 years of estimates. And we could see that they were going to be in the 12% bracket with lots of room for the next year. And then what we did is send them that money; it was taxed at 12%, so that would have been $3,000. They ended up saving $2,500 on that one decision.
And think about this when you compound that over time with your various decisions. This basic understanding of tax brackets in retirement can fundamentally change how you do Roth conversions, what account you pull from, whether you pull from a taxable brokerage account with gains, whether you pull from Roth accounts, whether you pull from your regular IRA accounts. It can fundamentally change when you apply for Social Security and what decisions you make with that. So these are very, very significant foundational items to understand and apply to your situation.
Now, these are the kinds of decisions that we help clients make all the time, right? This is a regular part of what we do. If you want to see how a tax map works or kind of where you might have blind spots with your own retirement and how you’re going to apply proactive tax planning to the investments that you choose and the plan that you move to, that’s a significant part of getting ready for the big retirement challenge.
So you can schedule a time to sit down for a Retirement Review where we help you look at your blind spots, whether that be with taxes or your income or the key pieces of putting a plan together, because having assets is not the same as having a plan. If you like this video, we’re creating an entire tax series that talks about a lot of the common things that we see and that we need to do with clients when we help them with their taxes and retirement and creating a plan. Just subscribe to the channel, or if you like this video, click the like button. I’ll see you next time.