As a FERS participant, one of the many decisions you have to make when planning your retirement is choosing when to “turn on” your Social Security benefits and when to start taking distributions from your traditional TSP. Of course, a major consideration is the income taxes you’ll owe Uncle Sam. Coordinating your TSP and Social Security is one way to help lower your taxes.
Consider Starting TSP Withdrawals First
Once you’re retired and turn age 73 (for those born after December 31, 1950), Required Minimum Distributions (RMDs) kick in. Since your traditional TSP was funded with tax-deferred earnings, 100% of your withdrawals are subject to income taxes. If you haven’t taken any distributions from your traditional TSP when your RMDs are due, you may end up in a higher income tax bracket. That’s why it makes sense to start taking TSP distributions before you become subject to RMDs.
“As you draw down your traditional TSP balance, it makes sense to delay filing for Social Security.”
TSP Installment Payments Help Lower Your RMD
If you’ve set up installment payments from your traditional TSP that exceed the amount of your RMD, you don’t have to withdraw additional funds when you reach 73 because you’ve satisfied the RMD requirements. The same applies to any single withdrawals you’ve made since retiring that exceed your RMD. As you draw down your traditional TSP balance, it makes sense to delay filing for Social Security.
Delay Filing For Social Security Until Age 70
While paying income taxes on distributions from your traditional TSP, it may be wise to wait until age 70 to “turn on” your Social Security. When you delay your Social Security beyond your Full Retirement Age (FRA), you earn credits that continue to increase your benefit by 8% each year up until age 70. Essentially, by taking distributions from your traditional TSP and simultaneously delaying Social Security, you’re minimizing your overall tax burden now and later when you’re subject to RMDs.
It’s About Minimizing Your Tax Burden
IRS thresholds for taxing Social Security aren’t high at all. If your combined income is $25,000 to $34,000 (single) or $32,000 to $44,000 (couple), up to 50% of your benefits may be taxed. If your combined income is above $34,000 (single) or $44,000 (couple), up to 85% of benefits may be taxed.
If you’re claiming Social Security benefits while also taking TSP installment payments to lower RMDs at 73, you may easily exceed the IRS thresholds for taxing Social Security. This is why tax planning is essential for FERS retirees. Touch base with an FRC® trained advisor to learn more.
