I understand that traditional IRA gives you a deduction now and tax you later when you withdraw. I need a clue on how much tax is charged on withdraw.

Say I deposit $4,000 into traditional IRA and my tax due is reduced by $800. How much tax do I pay on the $4,000 when I withdraw at 59 years old? Ballpark figure?

Say my income is same when I deposit and when I withdraw.

  • 2
    It depends on the tax bracket that you are in when you make your withdrawal. Apr 11 '19 at 11:01
  • @BobBaerker Same bracket as when I made my deposite
    – bakalolo
    Apr 11 '19 at 11:03
  • 2
    @bakolo - Google "US tax brackets" and determine the tax bracket you are in, then calculate the tax due. Apr 11 '19 at 11:38
  • 1
    I've updated your question to remove the term "refund" since that term indicated the amount of tax that was withheld in excess of what you owe. It includes ALL income and deductions, not just retirement, so it's not the appropriate term to describe what I think you are describing.
    – D Stanley
    Apr 11 '19 at 15:45
  • I would qualify that a traditional IRA contribution often, but not always, results in a deduction. However, if you you or your spouse is covered by a retirement plan at work, contributions may not be deductible depending on your income. Whether your received a deduction for prior contributions is also a factor for determining the tax owed when you withdraw later. Apr 11 '19 at 19:21

It would be taxed at your marginal tax rate at the time of your withdrawal. So if your $4,000 contribution reduced your taxes by $800 (I'm intentionally not saying "refund") then your marginal rate is 20%, and you'd get taxed at 20% when you withdraw (all else being equal). For a more concrete example, (using this year's tax brackets) if your taxable income were between $82,000 and $157,000 (roughly), it would be taxed at 24%. Note that the withdrawal is itself considered income, and so if you are close to the top end of a bracket, it could cause some of it to be taxed at one rate and some at a higher rate.

  • Isn't it common to compare the average tax rate for withdrawals versus the marginal tax rate for deductions? I haven't thought through the logic myself though.
    – Craig W
    Apr 11 '19 at 14:08
  • 2
    Well, it may be common but it's not accurate since you pay the marginal rate on additional income. Using the average rate would understate the tax amount. That said, since the incomes and rates at the time of retirement are speculation it's somewhat arbitrary anyways.
    – D Stanley
    Apr 11 '19 at 14:40
  • @DStanley: Usually retirement income is enough to cross through several different brackets; that's why the average comes into it. The marginal rate of taxation is only applicable to the savings decision on the marginal dollar... not to the question "How much do I need to save to live comfortably in retirement?"
    – Ben Voigt
    Apr 11 '19 at 15:11
  • 4
    @DStanley - I think your answer is correct as it stands. The question was specifically about the savings in a Traditional IRA. The average tax rate would only apply if that was the entirety of retirement income, which it rarely is. The tax calculation on withdrawals, when the amount to withdraw is not mandated by age and life expectancy (as it isn't at age 59.5), should always be done on the marginal income. Apr 11 '19 at 15:31
  • 2
    @BenVoigt To be fair, the question states that "my income is same when I deposit and when I withdraw." so marginal rates would be appropriate (granted it's a completely hypothetical scenario)
    – D Stanley
    Apr 11 '19 at 15:44

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