As you know, income from your FERS annuity (pension), Social Security and traditional Thrift Savings Plan (TSP), is subject to federal income taxes. However, there are certain types of retirement income you don’t have to report to Uncle Sam at tax time.
The Roth TSP & Other Roth Retirement Accounts
Since your contributions to a Roth TSP are deducted from you after-tax earnings, you’re paying taxes on your contributions based on your current income tax rate. This means you won’t be paying taxes later when you withdraw your contributions and any qualified earnings in retirement. The same tax-free advantage applies to Roth IRAs or Roth 401(k)s you or your spouse may have.
“However, any interest on a life insurance payout is taxable and must be reported on your tax return.”
Life Insurance Proceeds
Did you know that proceeds from a life insurance policy are not subject to federal income taxes? If you’re named as a beneficiary on a life insurance policy held by a spouse or parent, the proceeds are not included in your gross income when you file your taxes. However, any interest on a life insurance payout is taxable and must be reported on your tax return.
Up To $500,000 In Proceeds From A Home Sale Is Tax Free
Thanks to the capital gain exclusion for homeowners, according to the IRS, up to $250,000 of proceeds are tax free for single filers. If you’re married and file jointly, up to $500,000 is tax free. To qualify for the exclusion, you must have owned your home for two years and used it as your primary residence for at least two of the five years prior to the sale.
Volunteer Reimbursements For Expenses
It’s important to know that certain kinds of funds that you receive related to volunteer work for federal programs are not subject to federal taxes. According to IRS Publication 525, these include reimbursements to volunteers working for the Service Corps of Retired Executives (SCORE), National Senior Service Corps programs and the Tax Counseling for the Elderly program.
Other Types of Tax-Free Income In Retirement
Certain benefits paid through the U.S. Department of Veterans Affairs (VA) are not treated as taxable income. These include disability compensation and disability pension payments; Veterans’ insurance proceeds and dividends paid to veterans or their beneficiaries; and interest on insurance dividends left on deposit with the VA.
The interest income from municipal bonds is also free from federal income tax. And, if you live in the issuing state, it’s usually not subject to state income tax, either. If you’re considering a Reverse Mortgage, the payments you receive are also tax-free. To learn more, download IRS Publication 525.
