Tax Day has a way of clarifying things. For federal employees, especially those who have recently retired or separated from service, this year’s filing may look quite different from years past. Here’s a straightforward breakdown of what to keep in mind.
Your retirement income is probably more taxable than you expect.
The federal retirement system is built on three income streams: your FERS annuity, the Thrift Savings Plan, and Social Security. Each is handled differently under the tax code.
For most federal employees who retired recently, approximately 95% of their pension is considered taxable income. The remaining 5% represents a return of your own prior contributions. Your OPM Form CSA 1099-R will spell out exactly how much is taxable.
Traditional TSP withdrawals are fully taxable as ordinary income. Roth TSP withdrawals, provided you’ve had the account for at least five years and are at least 59½, are generally tax-free.
Up to 85% of your Social Security benefits may also be taxable, depending on your combined income. Many federal retirees are surprised by how quickly their annuity and TSP income pushes them past the IRS thresholds.
A new deduction worth knowing about.
The 2025 federal tax law created an additional $6,000 federal income tax deduction for each taxpayer age 65 or older, available through 2028. It phases out starting at $75,000 modified adjusted gross income for single filers and $150,000 for joint filers. It doesn’t change how Social Security is taxed, but it can meaningfully reduce overall taxable income for eligible retirees.
Don’t overlook withholding.
Unlike during your working years, retirement income doesn’t come with automatic withholding. Your FERS annuity has taxes withheld based on your W-4P elections, and if you didn’t specify, OPM defaults to withholding as if you were married with three allowances, which may not reflect your actual situation.
Your FERS pension also does not automatically withhold state income taxes, meaning you may need to set up quarterly estimated payments depending on where you live.
If you separated before retirement eligibility.
Federal employees should also note that severance pay is fully taxable in the year it is paid and can temporarily push your income into a higher bracket than expected. If you received a lump sum this year, it’s worth double-checking whether enough was withheld to cover your liability.
The bottom line.
Federal retirement taxation is more layered than most people anticipate, and the interaction between your annuity, TSP, and Social Security can produce results that catch even well-prepared retirees off guard. If you have questions about how your specific benefits are taxed or how to structure your income going forward, a Federal Retirement Consultant (FRC®)can walk you through it in a complimentary benefits review.
