How is Your Federal Retirement Income Taxed?

By • March 22, 2009 Comments

“If you drive a car, I’ll tax the street. If you get too cold, I’ll tax the heat. If you try to sit, I’ll tax the seat. If you try to walk, I’ll tax your feet.” If you retire from the federal government, I’ll tax your pension, TSP and Social Security. I’m the taxman.

Exactly how is your retirement income taxed? Let’s look at it one piece at a time.

Most of your CSRS or FERS pension will be taxable. You receive your already taxed contributions back without having to pay any more tax on them. Unfortunately, you receive them back over your life expectancy.

For a retiree who is age 55, that is 360 months, or 30 years. The bulk of the pension you receive consists of Uncle’s contributions and earnings on both Uncle’s contributions and your contributions. Each year OPM will send you a form 1099-R which lists your total annuity, the taxable portion of your annuity, and your total contributions to the retirement fund.

If you die before receiving your contributions back, your survivor (if you have elected a survivor annuity) will continue to receive your contributions back tax free. If you have no survivor, or if your survivor also dies before recouping your contributions, the remaining contributions may be taken as a miscellaneous itemized deduction on the tax return your executor files for the year of your death. The deduction is not subject to the usual 2% floor that is applied to miscellaneous itemized deductions.

If you live past your life expectancy, you will have gotten all your contributions back and your entire annuity will be taxable.

There is an exception, but you do not want to find yourself eligible for it. It is called the “alternative form of annuity”. If you have 9 months or less to live, OPM allows you to recoup all of your contributions in a lump sum. That would leave the (slightly) reduced annuity that you receive fully taxable.

Your TSP is fully taxable (but you knew that already). You paid no tax on the money you contributed and it grew tax free. With the TSP, unlike an IRA, if you retire in the year in which you turn 55 (or later) there will be no early withdrawal penalty assessed for withdrawals. You must begin taking TSP distributions by April 1st of the year after the year in which you turn 70 ½ or April 1st of the year after the year in which you retire if you are age 70 ½ or older when you retire. Your TSP distributions are taxed as you receive them.

Up to 85% of your Social Security can be taxable as well. To determine the portion of your SS which is taxable you add up ½ of your SS, all your taxable income and certain tax-exempt income. The following chart shows how much SS might be subject to tax.

 

Filing Status

Income

Taxable SS

Single Under $25,000 None
Single $25,000 to $34,000 Up to 50%
Single Over $34,000 Up to 85%
Joint Under $32,000 None
Joint $32,000 to $44,000 Up to 50%
Joint Over $44,000 Up to 85%

 

All of your retirement income is taxed at your rate for ordinary income.

© 2014 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author (  |   )

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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