The Effect Of Taxes On Your Federal Retirement
The Effect Of Taxes On Your Federal Retirement
“In this world, nothing is certain but death and taxes” – Benjamin Franklin.
We all want our retirement income streams to last as long as possible.
And, the unfortunate truth is taxes could have a large effect on your retirement benefits.
Many federal employees fail to take taxes into account when planning for retirement.
We see many people unpleasantly surprised when they receive their actual take-home pay.
When sitting down with your spouse and drafting your retirement budget, be sure to take the below into consideration…
How Will Your Retirement FERS/CSRS Pension Be Taxed?
Your FERS or CSRS pension, is taxed as ordinary income.
However, the contributions you’ve made throughout your working career will come back to you tax-free.
You’ve already paid tax on these contributions when they initially came out of your paycheck.
These tax-free payments are incorporated into your monthly pension check in retirement, but they’re spread out over your life expectancy.
In summary, a large portion of your pension will be subject to ordinary income taxes.
As you create your monthly retirement budget, make sure you’re taking state and federal taxes into account on your pension.
How Will Your FERS Special Retirement Supplement (SRS) Be Taxed?
The FERS SRS is a benefit available to certain FERS retirees’ who retire before age 62.
Its purpose is to supplement Social Security income until a retiree reaches age 62 (you don’t become eligible for Social Security withdrawals until 62).
You can read more about the SRS here.
Unfortunately, up to 100% of your FERS SRS will be subject to taxation.
The specific tax rate you’ll pay will depend on your earned income and also the applicable state and federal tax laws at that time.
Another note about the FERS SRS: it is subject to an earnings limit.
According to OPM, this earnings limit was $18,960 in 2021.
For every $2 over earnings of $18,960, your FERS SRS will be reduced by $1.
Fortunately, for the purposes of this rule, most earned income is from W2-income — your FERS pension and TSP withdrawals would not count.
How Will Social Security Be Taxed?
Good news for you – social security isn’t always taxable.
However, up to 85% of your social security benefits can be in certain circumstances.
One of the ways Social Security becomes taxable is when you have other substantial income outside of your Social Security benefits.
This would include wages, self-employment, interest, dividends and other taxable income.
The amounts below and associated tax rates are directly from Social Security’s website (ssa.gov).
“You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service (IRS) rules. If you:
- file a federal tax return as an “individual” and your combined income is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
- file a joint return, and you and your spouse have a combined income that is
- between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $44,000, up to 85 percent of your benefits may be taxable.
- are married and file a separate tax return, you probably will pay taxes on your benefits.”
How Will TSP Withdrawals Be Taxed?
The Thrift Savings Plan is a fantastic accumulation account for retirement savings.
As a federal employee, you have the option of making either Traditional or Roth contributions.
Any Traditional TSP contributions you withdrawal will be subject to ordinary income tax rates at that time.
In most circumstances, a withdrawal prior to age 59.5 will incur an additional 10% penalty.
You can defer taking any withdrawals from your Traditional TSP until age 72.
At age 72, Required Minimum Distributions must be taken.
Distributions from Roth TSP will be tax-free, assuming guidelines are met:
- Age 59.5
- The account has been funded for at least 5 years
Which States Give You A Federal Retirement Tax Break?
- Your pension will be fully taxable at the federal level.
However, there are certain states that don’t tax pension income.
They include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming New Hampshire, Alabama, Illinois, Hawaii, Mississippi, and Pennsylvania.
- Up to 85% of your Social Security may be taxable, depending on income.
However, at the state level, 37 states do not tax Social Security benefits.
The 13 states who do include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.
- Most states will tax and TSP distribution as ordinary income.
However, there are 12 states who don’t tax TSP withdrawals: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, Illinois, Mississippi and Pennsylvania.
Connect with your financial professional to see how taxes can impact your future retirement income and savings.
By planning ahead, you can ensure you’re equipped with the information you need to make informed decisions about your retirement.
“You Don’t Know What You Don’t Know” and having the information you need can help you plan your retirement income.
Contact a financial professional from GPIS today — it’s complimentary!
For additional information, you reach us by calling 866-201-7829 or by sending an e-mail to email@example.com.
-Sam Wiss, RICP
This material is intended for information purposes only. By responding to this offer, you may be contacted by a licensed insurance and financial professional regarding life insurance and/or annuity products. Not affiliated with, or endorsed by, the federal government or any government agency. Contact your tax advisor regarding your specific situation.
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