The short answer: virtually all of it. That’s right – your FERS annuity (pension), Social Security and traditional Thrift Savings Plan (TSP) distributions are subject to federal income taxes. Add to this, depending on where you live, all of your retirement income may be subject to state taxes. Without professional tax planning, you may find yourself tapping into your TSP nest egg to pay an unexpected “tax bomb” in retirement.
Over 90% Of Your FERS Annuity Is Taxable
During your working years, you paid into your FERS annuity (pension) with post-tax dollars. Once you retire, the portion you contributed is tax free however it’s only a very small percentage of your annuity. The majority of your annuity is comprised of the government’s untaxed contributions to your retirement plus the earnings that accrue on both your contributions and the government’s contributions. And all of it is subject to federal income taxes.
“However, once you retire and start taking TSP distributions, Uncle Sam will want his cut.”
100% Of Traditional TSP Distributions Are Taxable
When you make tax-deferred contributions to your traditional Thrift Savings Plan (TSP) you lower your income taxes. The more you contribute, the better the tax break. However, once you retire and start taking TSP distributions, Uncle Sam will want his cut. Since your traditional TSP balance includes your tax-deferred contributions, your agency match, plus interest on your investment funds, every dollar you withdraw is taxable as regular income.
Up To 85% Of Your Social Security Income Is Taxable
As a FERS or CSRS Offset participant, you’re eligible for a Social Security retirement benefit because Social Security taxes were deducted from your earnings. Once you start collecting your benefit in retirement, 50% to 85% of your Social Security benefit is taxable when your combined income in a given year exceeds thresholds established by the IRS. The tax thresholds for 2024 depend upon your filing status:
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% of your benefits.
- Is more than $34,000, up to 85% of your benefits may be taxable.
If you file a joint return, and the combined income of you and your spouse:
- Is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
- Is more than $44,000, up to 85% of your benefits may be taxable.
An FRC® trained advisor can connect you with a highly-experienced tax professional to help you develop a strategy for lowering income taxes throughout your retirement years.
