Planning for your retirement doesn’t have to be a stressful, headache-inducing task if you have clear goals and an understanding of how to plan properly. When it comes to federal retirees, many are surprised to learn how taxes will impact their life after they say their final farewells to daily work life.

While many benefits that federal employees receive are unique to their specific job title and description, there are some things that you’ll want to understand about how taxes affect your retirement plans. Understanding how to plan for a comfortable retirement starts with understanding your needs, expenses, and goals just as much as understanding your federal retirement benefits.

Understanding Your Federal Benefits

Depending on your position and agency, your federal employee retirement benefits may differ from those of your peers or other people in the private sector. When you know how to make your benefits benefit you then you can leverage them to improve your retirement to help ensure you’ll be able to look forward to a well-planned and cozy life after work.

However, just because you’re a federal employee doesn’t mean that good ole uncle sam won’t want his cut of your retirement, even when it comes to the benefits your years of public service have earned you.  So just how much do taxes affect your retirement plans?

The IRS and Your Benefits

Your pension is viewed as a continuation of your income and, as such, your retirement benefits are indeed taxable. Your pension will also count against your Provisional Income which is used in determining whether or not your Social Security benefits will be taxable.  Traditional TSP distributions are taxable as income and count against Provisional Income limits as well (as does 50% of your Social Security benefit). Taxes beget more taxes!  The combination of taxable income streams emphasized in the FERS 3-Legged Stool creates a robust income which in turn creates a robust tax liability. Taking this into account when planning for your retirement is crucial if you want to get the most out of your retirement, avoid major “uh-oh” surprises from the IRS and avoid unnecessary taxes that you may need to pay.

Over your years within the workforce, you’ll accumulate your retirement savings that are either taxed straight as it’s taken from your paycheck (Roth) or as you withdraw them from your retirement account (traditional). Either way, taxes will be collected, and you need to understand how this might affect you in retirement.

Income Taxes

All of your retirement benefits including CSRS and FERS pensions are subject to income tax. Most likely your social security benefits will also be subject to taxes, depending on your income. With the income threshold being surprisingly low, the majority of employees have their social security benefits taxed, so this gives you yet another thing that you’ll want to consider while planning for your retirement.

A tax deferred account defers two key things. First, it defers payment of the tax bill until you withdraw the money. The second key thing it defers is the calculation of your tax liability. This means that Congress has the power to lay claim to a larger percentage of your hard earned savings if Congress cannot reign in their insatiable appetite for spending. Imagine you apply for a mortgage on your dream home and the bank says that you can defer paying them now and when you sell that home they will determine what they feel their share should be… would you sign up for such an ambiguous mortgage  arrangement?  Probably not!  So why accept those terms on your tax-deferred accounts?

Remember To Account For Taxes in Your Retirement Planning

A common mistake for federal employees when it comes to retirement planning is forgetting about these taxes. About 90% to 98% of your CSRS or FERS pension is going to be taxable, and if you don’t factor this into your retirement planning it can cause some unpleasant surprises in your budget each month. 

So being sure that you take this into consideration while planning before retirement can help you achieve your financial goals more accurately when it comes to life after work.

If You Didn’t Plan For Taxes in Retirement…

So what happens if you don’t take taxes into account when you’re planning for your retirement? Well, one of several things can happen if you didn’t plan on your federal employee benefits being taxable.

  • You might have to work longer or go back to work
  • You might have to adjust your lifestyle during retirement as taxes are being withheld
  • Roth conversions to create a tax-free element of your retirement portfolio – leverage today’s low tax rates to protect your retirement from potentially much higher future rates

Those are just a few of the possibilities that may have to happen if you forget to factor taxes into your retirement planning. Keep in mind, however, that if your taxes are taken out of a spouse’s 401k or TSP, those withdrawals will also be taxed the same if your household files jointly. 

Experience The Walker Capital Difference

Retirement planning can feel overwhelming and complicated, especially when you factor in things such as federal employee retirement benefits and changing tax trends.  That’s why the professional retirement planning experts at Walker Capital make it their goal to help you achieve your retirement goals.

We not only help you plan your retirement, but we also help with things such as insurance planning, and tax planning as well. We’re your go-to financial experts with the right team and the right tools to help make sure you can achieve your financial goals no matter where you’re at in life.