How taxes are estimated

Most retirement calculators ask for “your tax rate” and multiply. That is a poor model of a progressive tax system, and it is especially poor in retirement, when your income is assembled from sources that are taxed in completely different ways.

Why a single rate does not work

Consider a year where you need $80,000 to live on. Where it comes from changes the tax bill enormously:

From a traditional IRA, all of it is ordinary income.
From a Roth, none of it is taxable.
From a taxable brokerage account, only the gain portion is taxed, and at long-term capital gains rates.
From cash savings, none of it is taxed on withdrawal, because it was already taxed on the way in.

And the interactions bite. Pulling more from an IRA can push more of your Social Security into taxable territory, and can move you past the threshold where the net investment income tax starts to apply. A flat rate models none of this.

There is also a circularity a flat rate hides. Withdrawing $80,000 from an IRA to cover $80,000 of spending leaves you short by the tax on that withdrawal. Withdraw more to cover the tax, and the tax goes up again. So spending and taxes are solved together rather than one after the other.

What is modeled

Statutory 2026 federal and all-50-state (plus DC) tax tables, applied year by year, with brackets and the standard deduction carried forward along each simulated inflation path.

Ordinary income brackets
Long-term capital gains and qualified dividends, stacked on top of ordinary income at the 0/15/20 rates
Net investment income tax
Employee payroll tax (Social Security and Medicare), plus self-employment tax on side income and the additional Medicare tax
Taxable Social Security benefits, using the standard 50%/85% formula
State income tax, and state payroll tax where a state has one
Required minimum distributions as ordinary income
Early withdrawal penalties, where they apply
The extra standard deduction from age 65

Investment income is taxed according to the account that earned it. Dividends inside an IRA or a Roth are not taxed in the year they are paid, because in reality they are not.

Year-end rebalancing is a separate step, after growth. Trades inside IRAs, 401(k)s and Roths realize nothing. Trades in taxable accounts realize long-term capital gains, and that extra tax is taken from taxable accounts afterwards — it is not part of the living-year bill, and it does not appear as Tax Return Payment on the Cash Flow tab. Under the default rebalancing strategy that extra tax is almost always zero, because taxable accounts are only sold to rebalance when doing so adds no tax. The other option, which sells until the mix is close enough, is where a large starting gap becomes a first-year tax spike. See How rebalancing works.

What is not modeled

This list matters as much as the one above.

Itemized deductions. The standard deduction is always applied. If you itemize meaningfully, your real tax is lower than shown.
Local and municipal income taxes. If you live somewhere with a city income tax, your real tax is higher than shown.
The Alternative Minimum Tax.
Tax credits of any kind, and the Qualified Business Income deduction.
Filing statuses other than Single and Married Filing Jointly. Head of household and married filing separately are not available. Filing status is derived from whether the plan is for one person or a couple.
Roth conversions.
State pension and retirement income exclusions. Several states exempt some retirement income; that is not reflected, so those residents see too much state tax.
Estate, gift, inheritance, and generation-skipping taxes.
Anything outside the United States.
Paycheck withholding. The year’s tax is treated as a single payment rather than withheld through the year. Over a full year the total is what matters, but it means the Cash Flow diagram shows one tax outflow rather than twenty-six. In a partial first year only the remaining share of the annual bill is taken, because earlier withholdings are assumed already out of the balance you entered.

The first year is different

A plan starts from balances as of today, and does not reconstruct the income you have already earned and the money you have already spent this calendar year. The first year covers the remaining whole months only.

Tax for that stretch has two jobs. The bracket is a full-year picture: remaining-year amounts are treated as a typical pace for the whole year, then taxed on the annual tables and standard deduction. The cash taken from the plan is only the remaining months over 12 of that bill.

That cash step is the withholding assumption. The balance you entered is as of today, after earlier paychecks, so federal, state, and FICA already withheld is already out of that balance and is not withdrawn again. Remaining paychecks are treated as continuing to withhold at the annual rate. Paycheck-by-paycheck withholding is still not modeled — Cash Flow shows one tax outflow rather than twenty-six.

It is still a planning estimate — a bonus in March or a raise in November is not in the remaining months, so it is missed — but it no longer applies a full year’s deduction to a few months of income, and it no longer charges a full year’s tax against a November bank balance. Later years are unaffected. The year detail window states these assumptions in a table wherever they apply.

Tax law changes

The tables are the ones in effect for 2026. Rates, brackets, thresholds, and rules can all change, and over a thirty-year projection some of them certainly will. The tables are updated once a year, after the IRS publishes the following year’s figures in the fall. If a projection is run before that update lands (in early 2027, say, while the tables still say 2026), the brackets and the standard deduction are nudged forward at an assumed 2.5% a year rather than left stale.

None of that makes a thirty-year tax estimate precise. It makes it a reasonable planning estimate, which is the most any tool can honestly offer at this horizon.

What to do with all this

Use the tax figures to compare scenarios, not to plan a return. The comparison between two plans is far more reliable than either absolute number, because most of the simplifications above apply equally to both.

If a specific tax question is load-bearing for a real decision, that is the moment for a professional.