Most Feds expect a smoother tax picture once they leave government. But the mix of pension income, withdrawals from the Thrift Savings Plan (TSP) or an IRA, and Social Security can potentially keep you in the same tax bracket you held while working. Smart sequencing and timing – not just disciplined saving – determine how much of your retirement money you actually keep.
Start with the full picture. Add up your Federal Employees Retirement System (FERS) or Civil Service Retirement System (CSRS) pension (after survivor benefits, Federal Employees Health Benefits (FEHB) premiums, and taxes), your planned Thrift Savings Plan (TSP) or IRA withdrawals, Social Security, and any part-time income. This gives you your “income stack.”
Then compare your marginal tax rate to your effective tax rate. The marginal rate shows you the impact of each extra dollar; the effective rate shows you what you actually pay on average. Align your withholdings so you aren’t surprised in April and can stay ahead of any tax shifts.
A quick annual income check can help you stay on track:
To stay ahead of surprises, revisit your strategy annually – think of it as ongoing tax planning for federal retirees, not a one-time exercise.
Traditional accounts anchor most Federal retirees’ income, and every dollar you withdraw from a traditional TSP or IRA is generally taxable. That’s why tax planning for federal retirees has to focus on both amounts and timing. If you expect a higher income later, consider drawing modestly from these accounts earlier.
During lower-income years consider, partial Roth conversions which can help smooth taxes over time. Conversions add taxable income in the year you complete them, but future withdrawals from the Roth are tax-free.
Keep required minimum distributions (RMDs) on your radar. RMDs begin at age 73 or 75, depending on your birth year, and large balances can force big – and fully taxable – withdrawals. Aim to integrate TSP withdrawal taxes and RMDs into a long-term plan, so those distributions don’t spike your tax bill later.
Up to 85% of your Social Security benefit can be taxable based on your “provisional income.” That includes your adjusted gross income, tax-exempt interest, and half of your Social Security. Your timing matters: delaying or pulling from other accounts first may reduce how much of the benefit becomes taxable.
Medicare adds another layer. Part B and Part D premiums include an Income-Related Monthly Adjustment Amount (IRMAA), which relies on your tax return from two years earlier. A large withdrawal or Roth conversion today can raise your premiums down the road – so treat Medicare as part of your tax strategy.
State taxes vary widely. Some states tax federal pensions and TSP income; others don’t. But don’t chase a “no-tax state” without looking at the full cost of living. Higher property, sales, or service taxes can overwhelm your savings. Think in terms of total cost and long-term lifestyle.
Retirement taxes shift each year, so keep a flexible strategy:
One strategy our Feds often use: fill up your current tax bracket with distributions from taxable IRAs and the traditional Thrift Savings Plan. If you need more income, look to brokerage accounts – where only gains are taxed as long-term capital gains (15% for most incomes) – or to Roth IRAs, which are totally tax-free upon distribution, to avoid bumping yourself into a higher bracket.
With the right order and timing of income, you can smooth out tax bumps and keep your cash flow steady. A little planning goes a long way toward protecting the retirement you worked hard for.
If you want help building a retirement tax plan that fits your specific income, goals, and timeline, reach out to the team at Serving Those Who Serve at [email protected].
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. **
TSP: The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. The TSP is a defined contribution plan, meaning that the retirement income you receive from your TSP account will depend on how much you (and your agency or service, if you’re eligible to receive agency or service contributions) put into your account during your working years and the earnings accumulated over that time. The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP.ÐRA: Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth IRA: Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Roth Conversions: Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. RMD’s are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
The FedLife Podcast is your in-depth, biweekly deep dive into the world of federal benefits and retirement planning. Hosted by federal benefits expert Ed Zurndorfer and Dan Sipe of Serving Those Who Serve, each 30-minute episode unpacks the complexities of FERS and CSRS retirement, FEHB and Medicare, survivor benefits, tax planning, and more. Designed for federal employees and retirees who want more than just the basics, FedLife goes beyond the headlines to explore the rules, nuances, and strategies that can make a meaningful difference in your retirement. Remember: it’s your Fed life, make it a great one.
The Fed15 Podcast is your weekly 15(ish)-minute briefing on federal benefits and financial planning, built specifically for federal employees and retirees. Hosted by Dan Sipe and Katelyn Murray of Serving Those Who Serve, each episode delivers clear, actionable guidance on topics like FERS and CSRS retirement, TSP strategies, FEHB, survivor benefits, tax planning, and more! Whether you’re five years from retirement or already there, The Fed15 helps you cut through the noise, avoid costly mistakes, and make confident decisions about your federal benefits.
