A marginal tax rate measures the additional tax caused by the next unit of taxable income. In retirement planning, that unit can alter several tax streams at once: ordinary income tax, capital gains tax, taxable Social Security benefits, deductions, credits, or Medicare premiums. section 9.3.3 section 9.4
An extra $10,000 withdrawal
With $80,000 of ordinary income and $40,000 of capital gains, total taxes are $12,600: $9,600 on ordinary income and $3,000 on gains. Increasing ordinary income to $90,000 raises total taxes to $15,300, an increase of $2,700. The marginal tax rate is therefore 27%, even though the ordinary-income rate is 12%, because the added income pushes $10,000 of gains from the 0% bracket into the 15% bracket. section 9.3.3
A marginal rate can therefore exceed the displayed rate on the income being withdrawn. Additional IRA income may increase taxable Social Security benefits, trigger deduction or credit phase-outs, raise Medicare premiums through IRMAA, or reduce IRA deductibility. These indirect effects belong in withdrawal comparisons because they change the cost of the next dollar. section 9.3.3 section 9.4
