How Is Your Federal Employee Retirement Income Taxed?

By on January 31, 2012 in Current Events, Retirement with 36 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 for federal income tax purposes? 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. The Roth TSP (planned for spring of 2012) will be taxed similar to Roth IRAs.

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 for federal income tax purposes.

States vary widely in their tax treatment of retirement income. Members of NARFE (National Active and Retired Federal Employees Association) have access to detailed information on the state treatment of federal annuities on their website http://www/narfe.org.   The Retirement Living Information Center has more information on the taxation of retirement income on their website http://retirementliving.com.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. 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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  1. Xiddah1939 says:

    If you die before you have recovered your contribution to your retirement; doesn’t your designated beneficiarys receive a
    lump sum payment of the remaining contribution?

  2. bbf says:

    Federal employees have been screwed since 1984 with the Pension Offset deal….and that so-called “Windfall Elimination Provision”.   Social Security benefits are reduced by two-thirds of our government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, is deducted from your
    Social Security benefits. So what if you fully paid into Social Security before or while working for the Federal government in a private sector job?  Wonder how much extra money has gone into the government coffers by reducing the amount of Social Security paid to retired government workers?  Billions?  Trillions? Maybe the Congress who passed the “Windfall Elimination Provision”, considered their pensions as “Windfalls”..but I doubt if any Federal retiree feels the same way.

  3. RetiredinLTCO says:

    How is the SS Supplement taxed?

  4. Manage This! says:

    Ok, I get that there is a lot of confusion over this topic – and some are even more confused than others as they are thinking the TSP as the retirement “income” vs the actual retirement annuity however, there is a lot more going on here than is apparent by this article.
    For many (not all and certainly not most), there are other considerations.  Amoung these are other retirement annutities and receipts which they will elect to receive or will receive by virtue of their age or activities.
    In short – the amount of any tax is based on “INCOME from WORK” first and then on the returns from annuities, investments and lastly, savings and dividend interest earnings.  As these items are variable for every person, and the varieties are too wide to put into a single article – I’ll just state my point.
    Each person before making that decision to retire “WOULD BE WELL ADVISED” to seek out a qualified and certified financial advisor.  Their first measure of qualified should involve asking if the person has experience with retiree earnings programs and the taxation of those programs.  Once that is established – you should get a profile built that suggests to you the when, why and how elements of the various moneys you would/should/could receive.  Each of these has the potential to impact your valuation, taxes and actual reportable earnings for each year and a modification of any of them can have a dramatic effect on your taxes and the burden to satisfy Uncle Sams lust for greenbacks.
    I provide the suggestion above with sincere concern for all – but even more for federal retirees as there are choices that you make upon departing the Civil Service that can have repercussions for the rest of your life and potentially that of your spouse and children (be they adult or otherwise).
    In my last ten years of advising retirees and potential retirees – I have ran into enough situations to suggest this with vivid clarity.  “DO NOT ASSUME THAT TAKING ALL OF YOUR MONEY OPTIONS UP FRONT WILL PROVIDE YOU WITH MORE MONEY TO LIVE ON.”  It is entirely possible that if you take everything up front – your earnings base will be sufficient to push you into a higher tax bracket and thus reduce the amount of your Net significantly.  The biggest mistake many make is to jump on the SSA as fast as they can to get their share of an ever dwindling fund before it is gone.  Though many assume this will give them a greater amount of money – they fail to realize that when everything is combined – it could break through the limits that are established to both reduce the amount you get and increase the taxes you pay on everything.
    A financial advisor who has a superior understanding of all of the tax issues and the breakouts on what parts are taxed and what are not (and how to protect some that are yet to come) can make your life well worth the small investment in time and money.

    • Manage This! says:

      sorry all – I was typing this up and failed to run it through the spell check before posting – was in a crunch – no excuse but just the same my appologies for the spelling errors – getting a bit heavier on the keyboard as I age 🙂

  5. Cjrbrown says:

    Question: My husband died suddenly 14 mo. after his retirement. I signed off on his annuity. He had about $61,000 in already taxed contributions when he retired. During his retirement about 8% of his pension was not taxable due to the “Simplified General Rule”which states this 8% is coming out of his contributions. After he died, OPM recouped all money that had been paid out to him, both taxed and untaxed. Instead of about $50,000, his estate received about $24,000(14 months later). It appears OPM follows a different rule after the death of a retiree than the Simplified Gen. Rule that was followed while he lived . Is this right?. It would seem that  his widow would receive the remainder of his contributions, minus the 8% paid out in his pension while he lived or at least be given the right to retrieve the $ that was taxed when he made the contributions while working and taxed again on his 1099’s. I’m confused and after multiple communications with OPM, they have not explained their reasoning to me.

  6. Sue Nawmy says:

    Which states besides New York do not tax civil service pensions?  Anyone, please?

  7. Jrojas1234 says:

    Does any body know at what rate IRA distributions are taxed if taken out after 59 1/2.  Is it considered income and taxed as such? Or is it capital gains and taxed at a lower rate?

  8. Daveal1940 says:

    Your CSA 1099R form does not list the taxable portion of your annuity. It has UNKNOWN in Box 2a. You may calculate the taxable income using the Simplified Method Worksheet. 

  9. good_reader1 says:

    Oregon only taxes a percentage of your Federal pension using what you make only considering your work after Oct 1, 1991.

    Current employees health is listed as pre-tax but after you retire it is considered as earned income. That needs to be changed since we are wealthy if we worked in civil service, every deduction counts.

  10. retired and loving it says:

    If I die and then my survior dies before my CSRS contributions are recouped, will her executor be able to claim the balance of my contributions on her final return?  It seems the answer should be yes. 

  11. Air13148 says:

    Also remember many states will not tax civil service pensions.  New York (believe it or not) will not tax the FERS defined benefit portion of your pension.  The supplement (however long it continues to exist) and TSP are taxed.

  12. guest says:

    Would you please explain  “If you live past your life expectancy, you will have gotten all your contributions back and your entire annuity will be taxable”  in a little more detail? Thanks!

    • Fedbens says:

      The taxable part of your annuity is reduced, in accordance with your life expectancy and your contributions to the pension fund and whether your have elected the survivor option for your spouse.  Once you reach your expected life span, the reduction ends.

      The above may be more clear if you go to fedbens.us and click on no. 5 on the menu.

      Good luck!

    • ProudRetiredFED says:

      I’m not him or an expert but his article pretty much answers your question. What he said is the money YOU paid in (already paid tax on this) will be distributed back to you over “your life expectancy” of about 30 years, so for 30 years part of your annuity payment will NOT be taxed, for it is the money you already paid in.  You always pay tax on the part THE GOVT pays on your annuity, and for 30 years (your life expectancy) they only pay a part of your annuity, and you do pay tax on that. However, after 30 years all YOUR money that you paid in has now been given back to you, so your entire annuity amount is now from the government, and this entire annuity will be taxed.

      The only way out of it is to somehow become part of the “1%” and then you probably won’t have to pay any tax on it, or certainly will have a few loopholes to pay much less than you do now.

      or you could vote republican, and watch them dismantle the entire fed retirement annuity system and you can just live off your savings and TSP.

  13. Jimijr says:

    Here’s a question. While working, my health insurance premiums were pre-tax; they were listed as such on my W2. My 1099R does not show this. May I include my insurance premiums in my health care costs on the good ‘ol 1040 Sched A?

    • Retiredwannabe3 says:

      Yes, you may include these premiums under medical on sch A; if you are self-employed as I am you may deduct them as part of sch C(business profit/loss) to lower the amount that you must pay in as self-employment tax(net income over $400 is subject to the 15.3% tax).  I retired as a revenue agent, but I also checked with several CPAs.

  14. msgrowan says:

    An excellent, concise, and clearly presented article as usual, Mr. Grobe.  If I might suggest a sequel, it would be to ask that you address the tax implications of the various TSP withdrawal options, for those who choose one of these, as opposed to leaving their TSP account in place and taking the required distributions from it once they reach the mandatory point that they must do so by April 1 of the year after the one that they attain the age of 70 1/2.

  15. DOD waiting on my money says:

    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.

    I have CSRS and have put in for the alternate form of annuity for my severe congestive heart failure = I will be paying the government almost $700.00 a month to get my money so my annuity is being reduced by 700.00 a month – to me this is not SLIGHTLY reduced.

    • James says:

       If you have some extra income.  Look into the new stem cell shots for the heart.  You might be able to afford one or get into a study.    They, in essence, regrow dead heart tissue and increase ejection fraction 15-25% per shot and seem to be permanent.   I hope your condition improves.

  16. lazycs says:

    This really isn’t rocket science. CS only pay 5% of the total FERS contribution so the $$ amount excluded is minuscule

    • James70094 says:

      If you knew anything about the facts, you might not be wrong all the time.

      • lazycs says:

        99.9% accurate. Let me know when you need my help. Its obvious that simple research is beyond your ability

        • James70094 says:

           No, you are 99.9% wrong and from your posts, you can not understand simple research. FERS is 3 parts and the pension is not a full pension as it was under the old CSRS. Even so, I contribute to all 3 parts and the total is much more than 5%. You keep spewing the same outdated retirement data and misinformation about salary again and again. You are the one who needs help. Maybe start with kindergarten, you might be able to keep up there.

          • Bill T. says:

            The same point occured to me. In fairness, he was explicitly talking about the FERS anuity. Most people (myself included) think TSP, anuity, SS when we think of our FERS benefit, seeing as how the plan we are under is called “FERS” and includes all three. His statement “… total FERS contribution ..” led us to believe on first reading that he was talking the total benefit, seeing as how he used the word “total”. He manages to be wrong enough that I had a knee-jerk reaction that he was wrong this time too and contributed to my mis-reading.

        • James70094 says:

           And just what is the contribution rate for pension? Doubt if you can even come close.

    • Bill T. says:

      Wrong again, congratulations.

      I’m depositing 15% of my income to FERS, the government contributes 5%, therefore I’m making 75% of the deposits.

      If someone is putting 5% in then the government is also putting 5% in therefore it would be 50-50.

      The only case where the government contrubutes signifacntly more is when the employee deposits nothing the the government puts in 1% (of salary).

      • Independent One says:

        No, I think lazycs is correct.  He is talking about FERS and not TSP.  It seems you are talking about TSP and your contributions to that.  The USG contributes more under FERS than the employee does.  Please check your latest LES to see what the contributions are.  It is ok to criticize if you are critizing for the right reason.  But in this case, you are wrong.

        • Bill T. says:

          OK, that appears to be my error.

          How does this add to or clarify the Mr Grobe’s statement “Most of your CSRS or FERS pension will be taxable”?

          • lazycs says:

            How does it?? It simply shows that your untaxed portion is about $200 a year

          • Bill T. says:

            To give you an (imperfect but good enough) analogy, how does it differ if I ask for six donuts or half a dozen?

            If most of my anuity will be taxed that means that I didn’t contribute much. No information added.

        • James70094 says:

           TSP is FERS. FERS is made up of 3 components, TSP, SS and a small pension. We contribute to our TSP, SS and even the pension.

  17. Fedbens says:

    Use the handy software calculator at fedbens.us (#5 on the menu) to find out exactly how much your monthly tax reduction will be.  In addition to your annuity contributions and age, this tool also factors in the marital status and the spouse age, if you are married.

    fedbens.us

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