Federal Tax

Here are the Top 5 Tax Concerns Federal Employees Have About Retirement, based on commonly asked questions and advisor experiences with FERS and CSRS retirees:

• 1. Will My FERS or CSRS Annuity Be Taxed?

  Yes. Both FERS and CSRS annuities are subject to federal income tax, though part of the annuity may be tax-free based on the “simplified method” (recovery of after-tax contributions made while working).

  • CSRS retirees, who typically contributed more, often have a larger non-taxable portion.
  • FERS retirees usually have a small non-taxable portion.

  💡 Key Concern: Many federal employees are surprised their pension isn’t tax-free and want help estimating their after-tax income.

• 2. How Are Social Security Benefits Taxed in Retirement?

  Social Security benefits may be partially taxable depending on total income, including:

  • FERS pension
  • TSP withdrawals
  • Outside income

  If their combined income (AGI + 50% of Social Security + tax-exempt interest) exceeds thresholds, up to 85% of Social Security benefits could be taxable.
  📌 FERS retirees must plan for this — especially once RMDs start.

• 3. What Are the Tax Implications of TSP Withdrawals?

  Withdrawals from traditional TSP accounts are fully taxable as ordinary income. Key points:

  • No early withdrawal penalty if separated during or after the year they turn age 55 (or 50 for special category employees).
  • Roth TSP withdrawals are tax-free if qualified (account held ≥5 years and age 59½+).

  📉 Concern: Many retirees underestimate the tax hit from lump-sum or large TSP withdrawals.

• 4. How Do Required Minimum Distributions (RMDs) Affect My Taxes?

  Starting at age 73 (or 75 if born in 1960 or later), retirees must take RMDs from traditional TSP and other retirement accounts. These RMDs:

  • Add to taxable income
  • Can increase Medicare premiums (IRMAA)
  • May push retirees into a higher tax bracket

  ⏳ Concern: Retirees worry about losing control over when and how they access their TSP and IRA assets.

• 5. What State Taxes Will I Pay on My Retirement Income?

  While federal taxes apply to FERS/CSRS annuities and TSP withdrawals, state tax rules vary widely:

  • Some states fully exempt federal pensions (e.g., FL, TX, WA – no income tax).
  • Others partially exempt or fully tax federal pensions and Social Security.
  • Many employees want to relocate in retirement and need state-by-state guidance.

  🧭 Concern: Where they live in retirement could significantly impact their after-tax income.