It’s simple – minimizing the taxes you’ll owe Uncle Sam in retirement can help make your nest egg last longer. With a strategic tax plan, you’re able to hold onto more of your income to achieve the financial security you deserve in your later years.
When you consider the complexity of our ever-changing tax laws, developing a tax-efficient plan is not a do-it-yourself job. It requires working with a professional who fully understand your FERS retirement benefits.
Understanding Taxes On Your Retirement Income
During your career with the government, you could utilize tax-deferred contributions to your Thrift Savings Plan (TSP) to help lower your income taxes. Other than that, you didn’t have much control over minimizing your tax burden. However, when you retire and start taking TSP distributions, Uncle Sam will want his cut.
“Then again, depending on where you live, some or all of your retirement income may be taxable under state law.”
It doesn’t stop there. As much as 90% to 98% of your FERS annuity is taxable and up to 85% of your Social Security benefit is also subject to taxes based on your provisional income. Then again, depending on where you live, some or all of your retirement income may be taxable under state law.
You Can Control Your Income Taxes In Retirement
Tax planning in retirement is different because you have the advantage of controlling the amount of your income and tax bracket in any given year. Though you’ll start receiving income from your FERS annuity as soon as you retire, you have the ability to decide the timing of your Social Security benefits and TSP distributions.
The Advantages Of Working With A Tax Professional
You’ve likely heard about two common strategies that can help lower your taxes in the early years of retirement. You can let your TSP until grow until you’re required to take distributions at age 72 under IRS law. For Social Security, you can avoid taxes on your benefit, and earn an additional 8% each year, if you delay filing until age 70.
However, when you work with a tax professional, they can recommend other strategies that can help lower your tax burden even more:
- Making sure you’re in the lowest marginal tax bracket each year.
- Taking advantage of Roth Conversions to make future distributions tax-free.
- Developing a strategic TSP withdrawal strategy to satisfy RMDs.
- What you need to know about tax-efficient insurance products and more.
Partner with an FRC® trained advisor who can recommend a knowledgeable tax professional. Together, they can help you develop a retirement tax plan tailored to your financial needs and goals.
