Tax planning for federal employees and retirees: Top 5 Facts.
Welcome to part seven of our series of “listicles.” We’ll be going over 5 key points to remember for several areas of retirement planning and employee benefits for members of the Federal Workforce. The first six topics we covered were FERS, CSRS, the TSP, FEHB, FEGLI, and social security. Now we’ll be covering taxes.
Attend our next no-cost webinar to learn more about tax planning for federal employees and retirees.
1. Tax Concerns for Federal Employees
Knowing how various federal benefits are subject to taxation is crucial when crafting a financial plan for a federal employee. And there can be a lot to keep track of. Hopefully this list acts a starting point to guide feds through the various tax topics that they may encounter. Understanding what benefits are taxed and how, on both the state and federal level, can help a federal retiree avoid costly mistakes upon their path to a financially comfortable retirement.
2. Traditional and Roth TSP
Even feds who have kept their distance from contributing to a Roth TSP account might have to start if they plan to make catch-up contributions. A FEDZONE article highlighted that catch-up contributions to the TSP will be required to be placed in a Roth TSP in the near future. Regardless of that, the main difference between a traditional TSP and Roth TSP is when the taxes are taken out. Traditional contributions are made tax-free, but then withdrawals from either a traditional TSP or IRA are taxed as ordinary income. Roth TSP contributions are made with post-tax dollars, but eligible withdrawals are not subject to any taxation. It is also important to remember that traditional TSP withdrawals made before reaching age 59½ are subject to an additional IRS penalty. Roth TSP contributions can be withdrawn without any tax consequences but withdrawing any earnings from a Roth TSP before either reaching 59½ or before the Roth TSP account has been opened at least five years, the withdrawals is subject to an IRS penalty as well. And lastly, be careful when converting from a traditional TSP account to a Roth IRA. (Check out Ed’s recent article on the matter.)
3. FERS/CSRS and Social Security
When it comes to traditional TSP withdrawals, pension income from either FERS or CSRS, and social security benefits, all three are subject to federal taxes. Maintaining a balance between how much monthly income one needs in retirement while staying in the lowest income tax bracket possible is one of the primary goals when it comes to tax planning for a retirement from the federal government. FERS contributions are made with after taxes have been taken, but unlike TSP contributions, they’re mandatory. The contribution portion of your FERS income is not taxable in retirement, but it ends up being a small percentage of the pension money received.
4. State and Federal Taxes
State taxes are a whole other story. Some states don’t tax FERS/CSRS income, social security, and TSP withdrawals (but usually have higher property taxes) while other states tax all three income sources. Then there is a mix of states that impose taxes on two of these types of income but not the third. 13 states will take taxes from social security retirement benefits, 12 don’t tax any of them, and there are at least 2 states that will not tax money from FERS or CSRS in retirement but will require you pay state tax on TSP distributions. For a whole list of what states tax which of these benefits, check out this article.
5. Other Benefits
FEHB premiums are paid after tax deductions during retirement as opposed to when feds were actively working as in-service premiums are paid on a pre-tax basis. Same goes for FEGLI premiums paid in retirement. In-service premiums come out pre-tax but any premiums due post-retirement, or for survivor annuitants, are paid with post-tax dollars. If you have FLTCIP coverage, premiums are not paid pre-tax, but the benefits aren’t typically taxed as income and the premiums are considered a qualified medical expense, which might be tax deductible if these total expenses equal at least 10% of your adjustable gross income amount.
Next Steps
If you’d like to dive into more detail about tax planning for federal employees and annuitants, check out this page. On that page, you can also register for the next tax planning webinar with Ed Zurndorfer. It’s never too early (or too late) to learn about your retirement benefits and start making a plan! For an even deeper dive into your retirement planning as a federal employee, check out our entire (no-cost) webinar series.
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Until Next Time,
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*Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.*
The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
