Your federal pension and TSP withdrawals can affect the amount of tax on Social Security income you pay in retirement.
A new Congressional Budget Office report estimates that Americans will pay $120 billion in income taxes on Social Security benefits in 2026. CBO projects that amount will rise to $212 billion by 2036.
For federal retirees, the issue can be especially important because Social Security may be combined with a FERS or CSRS pension and withdrawals from the TSP.
How Does Tax on Social Security Work?
The IRS uses a calculation that adds half of your Social Security benefits to your other income, including tax-exempt interest. That amount is then compared with income thresholds that determine how much of your benefits can be included in taxable income.
For 2026, the thresholds are:
- $25,000 for single filers and $32,000 for married couples filing jointly: No Social Security benefits are included in taxable income below these levels.
- $34,000 for single filers and $44,000 for married couples filing jointly: Up to 50% of benefits can be included.
- Above $34,000 or $44,000: Up to 85% of benefits can be included.
The thresholds were last changed in 1994 and are not adjusted for inflation. As incomes and Social Security benefits rise over time, more retirees can fall into the ranges where a larger portion of their benefits is taxable.
Can a Federal Pension Lead to More Tax on Social Security?
Yes.
The taxable portion of a FERS or CSRS annuity counts as income in the calculation. Traditional TSP withdrawals also increase the income used to determine how much of your Social Security benefits can be included.
That means a retiree receiving Social Security, a federal pension, and traditional TSP withdrawals could have a larger portion of their Social Security benefits subject to tax than someone relying primarily on Social Security.
A Roth TSP withdrawal is different. Qualified Roth withdrawals generally aren’t included in the income calculation used to determine how much of your Social Security is taxable. A Roth conversion, however, generally creates taxable income in the year of the conversion.
Does 85% Taxable Mean an 85% Tax Rate?
No. This is an important distinction.
If up to 85% of your Social Security benefits are taxable, that means up to 85% of the benefits can be included in your taxable income. It does not mean you pay an 85% tax rate. Your actual tax depends on your overall taxable income, deductions, credits, and applicable tax brackets.
Why Is This Becoming a Bigger Issue?
CBO estimates that tax on Social Security benefits will equal 7.1% of total benefits in 2026, up from 0.1% of GDP in 1994 to 0.4% of GDP in 2026. About two-thirds of the projected growth in this tax revenue reflects the way the tax rules work, including the fact that the income thresholds have remained fixed while incomes and benefits have increased.
CBO projects taxes on Social Security benefits will reach $212 billion in 2036.
What Does This Mean for Federal Retirees?
The source of your retirement income matters.
A traditional TSP withdrawal may increase the portion of your Social Security benefits that is included in taxable income. A qualified Roth withdrawal generally does not. The same consideration can matter when deciding whether and when to make a Roth conversion.
Before taking a large TSP withdrawal or completing a significant Roth conversion, federal retirees should consider how the additional income could affect both their overall tax bill and the amount of Social Security that becomes taxable. Reach out to a Federal Retirement Consultant (FRC®) who can walk you through the numbers and identify ways to reduce your tax burden.
