Retirement planning isn’t just about saving – it’s about ensuring your money lasts. One major threat is taxes. If overlooked, they can eat into your hard-earned savings. Many federal employees are unsure how retirement will change their tax situation. Let’s clear up a few key points.
Your Tax Bracket May Stay the Same
Many assume they’ll fall into a lower tax bracket in retirement, but most federal employees remain in the same one. While your salary decreases, your pension, Thrift Savings Plan (TSP) withdrawals, and Social Security benefits, most of which are taxable, often keep your taxable income at a similar level. Additionally, retirees must now pay taxes on their Federal Employees Health Benefits (FEHB) premiums. The only way to ensure a lower tax bracket is through careful tax planning long before retirement.
Taxes Apply to Your Entire TSP Balance
Some believe they only owe taxes on their original TSP contributions. However, taxes apply to both the principal and the investment growth. If your contributions to the TSP grow ten-fold, good for you, but taxes will be owed on the entire amount upon withdrawal.
Social Security Benefits Can Be Taxed
Many retirees are surprised to learn that up to 85% of their Social Security benefits can be taxed at the federal level. Given that most federal retirees have a taxable pension, it’s almost inevitable. Additionally, 13 states also tax Social Security benefits, including Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Knowing your state’s tax policy can help you avoid unwelcome surprises.
Eliminating State Taxes May Not Have Much Impact
Nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming – don’t tax income, including pensions. While this sounds appealing, these states often offset lost revenue with higher sales and property taxes.
Meanwhile, nine other states – Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Mississippi, New York, and Pennsylvania – exempt federal pensions from income tax, while five more – Kentucky, Michigan, North Carolina, Oklahoma, and Oregon – offer partial exemptions. While state taxes matter, they are only one piece of a tax-minimizing strategy.
Plan Ahead to Minimize Tax Surprises
Taxes don’t have to derail your retirement, proper planning can help. Work with a Federal Retirement Consultant® and a qualified tax professional to implement smart strategies and protect your savings for the future. Even if retirement is a distant reality, you can establish a blueprint to keep more money in your pocket when you reach your golden years.
