9/12/2023 0 Comments Tsp 1099 rLet’s say for our example that you might owe about $400 a month in taxes. Everyone’s tax situation is unique, and there are often many other factors that affect your tax liability.*** ***Please keep in mind this is just an example to demonstrate the impact of taxes. You estimate your retirement income to be $5,000 a month… but you forgot to figure in taxes. Your Spouse has a pension from their job of $800 a monthĪnd you’ll take $500 a month from your spouse’s 401(k) Social Security benefit of $1,200 a month And here’s how you plan to come up with that money: Say you and your spouse are expecting to live on $5,000 a month in retirement. Let’s look at what might happen if you forget to factor the taxation of federal retirement benefits into your planning… Taxation of Federal Retirement Benefits: Let’s Look at an Example… So you can see that taxes have a significant impact on federal employees in retirement.īut time after time, I see federal employees who forgot to figure taxes into their retirement planning. There’s a good chance your Social Security benefit will be taxed – depending on your income (and the income thresholds are shockingly low.)Īnd of course you know that the money you take out of your Thrift Savings Plan (TSP) account will be taxable. So most of your FERS or CSRS retirement pension will be taxable. (For more detailed information about the taxation of Federal Retirement Benefits and to see how your tax-free portion of your pension/annuity is figured – see IRS Pub 721 ) In my experience – your contributions usually amount to about 2% to 5% of your annual pension income for FERS and about 5% to 10% for CSRS.So that means that about 90% to 98% of your FERS or CSRS pension will be taxable. This means that the majority of your federal retirement pension income will be subject to income taxes.Įveryone’s contributions will be different, and CSRS will have a higher contribution than FERS. So many federal retirees would have about two years of tax-free income from their CSRS or FERS pension. But now the government considers your contributions to be stretched (amortized) over your life expectancy. Years ago – your contributions would come back to you first. Now – you will get your contributions back tax-free (since you already paid taxes on the money when it was taken out of your pay check).īut many federal employees are surprised that for tax purposes,their contributions are stretched out over their life expectancy. Your CSRS or FERS Pension will be taxed at ordinary income tax rates. One of the common misconceptions I see involves the taxation of federal retirement benefits.įederal employees sometimes forget that their federal retirement pension *is* taxable. Taxes have a huge impact on federal retirees. And if you forget to factor taxes into your retirement plans, you could be in for a shock. Taxes will have a big impact on your federal retirement. Many people simply forget – or perhaps just don’t understand the taxation of federal retirement benefits. How Will Your Federal Retirement Benefits Be Taxed?
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