So even if you end up back in the 25% tax bracket in retirement (unlikely for most of us), your effective tax rate, or average tax rate, is certain to be lower.
If you end up back at exactly the same place in retirement, both your marginal and effective (aka average) tax rates will be the same as they were before retirement. That's simply by definition.
I'm guessing (please correct if otherwise) that you may be referring to the "Traditional plans are good because you save at the marginal rate but pay at the average rate" belief. Traditional plans can indeed be great for early retirees because their
marginal rates are lower in retirement. E.g., sol's description:
It's really no different than the plan commonly discussed around here by people (like me) who intend to never pay a dime of taxes on their 401k contributions. They will get slowly converted to a Roth IRA over many years of retirement, each year's conversion amount staying low enough to fit in the 0% tax bracket. For a MFJ couple with deductions and exemptions and kids, that can easily be 50k/year. 5 years later they can come out of the Roth tax free, and I've never paid any income tax on those dollars. Not when I earned it, not as it grew, not when it converted, not when it was withdrawn.
It is somewhat difficult in real life to keep track of what money was contributed at what tax, and how much tax was taken on that same money and its returns when withdrawn. For discussion purposes, let's assume that each year's 401k/IRA/etc. contribution will be placed in a separate account so it can be tracked. Let's also assume there will be a base annual income, $Base, available in retirement. This base can be anything from $0 on up, and can come from pension, rentals, Soc. Sec., inherited IRAs, part-time work, etc.
The first year one makes a 401k/IRA contribution, any taxable withdrawals will be taxed at the marginal rate starting at $Base. Compare the marginal contribution tax to the marginal withdrawal tax and make the consequent trad vs. Roth decision.
The second year one makes a 401k/IRA contribution, one then knows that withdrawals will be taxed at the marginal rate starting at ($Base + any withdrawal coming from a previous traditional contribution). Compare the marginal contribution tax to the marginal withdrawal tax and make the consequent trad vs. Roth decision. Repeat for each subsequent year.
The more one contributes to traditional accounts, the higher the marginal rate on withdrawals becomes. If, as in sol's example, the
marginal rate in retirement is
always lower than when contributing, traditional is always better. But, due for example to a high $Base or high traditional contributions and/or returns, one can get to a point at which any further traditional contributions will be withdrawn at a marginal rate higher than the contributory rate. When that happens, Roth becomes better.
Of course, one can instead
start by contributing to a Roth. Doing this, the marginal withdrawal rate stays at whatever corresponds to $Base until the first traditional contribution is made.
Knowing one's marginal rate(s) in retirement does require an unnaturally clear crystal ball, so there will be some guesswork. Just keep the guesswork to marginal rates and ignore average rates.