Taxes and Your Federal Employee Retirement Income

By on January 30, 2013 in News, Pay & Benefits, Retirement

“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 Traditional 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.  This is true for both the Traditional and the Roth TSPs.  Your Traditional TSP distributions are taxed as you receive them.

The Roth TSP is funded out of already taxed dollars and the growth will be free from federal income tax if the Roth account has been open for at least five years and the individual withdrawing the money is at least 59 ½ years old.  It won’t be until 2017 that Roth TSP accounts will meet the five year rule.

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.

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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. 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. John Wilshire says:

    When figuring tax on my social security benefits are my TSP distributions considered income to be used in the formula on IRS Notice 703?

  2. Pulham says:

    When figuring the tax on SS, is one’s Federal pension considered income?

  3. FanofGeorgeHarrison says:

    in the midst of all these comments – I’d like to pause and give George Harrison of The Beatles credit for the opening lines from his song, “Taxman” 🙂

  4. bsmomma says:

    My full retirement age is 66 for Social Security and under FERS it was 56.  I was mis-informed that the ‘taxable income’ is the determining factor on taxing the social security benefits.  I was informed it was the ‘earnings’ eg work income, not income from our pension or TSP annuity.  FERS makes it very difficult financially to retire especially when my spouse doesn’t have a pension.  I guess I’ll be joining grannybunny in working longer, but I WILL enjoy my vacations, cruises etc while I am working. 

  5. Grandma Flea says:

    I think the information about retirement contributions is incorrect or misleading.  If you have unexpended retirement contributions, they are refundable to your survivors and not just used as a deduction when an estate tax return is filed.  For example, your children could be paid the balance of retirement contributions not expended based on the length of time you drew an annuiy and your life expectancy.  This can be a sizeable amount of money and should be highlighted as one more CSRS benefit.

  6. fredbg_anita says:

    Reference your article above, “Taxes and Your Federal Employee Retirement Income” from yesterday, you stated that 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.  My father, who was a CSRS employee, died and left my mother a survivor annuity which has both federal and state taxes taken out presently.

    Is there a way for me to determine how much he contributed to his retirement pension to see if my mother should not be paying taxes or would OPM have done this automatically?

  7. payingtoomcuh says:

    This article does not explain what happens under CSRS if you leave a spouse an annuity.  The computation changes as the age of your spouse also gets figured in to determine the period of time before your recover your paid contributions, so don’t marry someone a lot younger than you are.
    This is a major rip-off by the government.  It used to be you could withdraw your entire paid contributions and get a reduced retirement.  There is a major battle between IRS and OPM.  If you die, you would think the remaining money you paid into your retirement fund would be available for refund.  Thanks to OPM, they consider how much retirement money you have received, if it is more than what is left, they consider you have gotten everything back.  IRS says no, that money is spread out over the computation they use to determine how much of the (already taxed) money you paid into your retirement is tax-free until it is all paid back. 

  8. fedretiree says:

    Clarifying question – if you die before your CSRS contributions are exhausted  (in my case, 310 months), and there are no survivors for the pension annuity, doesn’t the remaining part of those contributions go to the retiree’s estate?

  9. daveal1940 says:

    Your statement “ 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.” is not true for me. OPM sends me a Form CSA 1099R with the Taxable Amount in box 2a marked “UNKNOWN”. I must fill out the IRS Simplified Method Worksheet to determine my taxable amount.

  10. Unaboater says:

    These 2 sentences linked together don’t make sense.

    “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.”

    1st sentence says pensions are taxed.  2nd sentence says our already taxed pension contributions don’t get taxed again? Not true.  They are, that’s why we get a 1099-R showing the additional tax each year, right?  Double-taxation on pensions, just like bank savings (taxed double – no incentive to save).

    • OldRet says:

      Most pensions are taxable except for an actuarial reduction in taxable income due to your already taxed contributions. Under CSRS (and I think FERS is the same) your taxable income will be less than your total income until your contributions are refunded.

  11. bsmomma says:

    When it comes to Social Security earnings, the year you turn 67, it doesn’t matter your income, your Social Security will not be taxed. I respect the idea that grannybunny is still working, some people enjoy being around people, people they’ve known most of their life. Working that long isn’t so bad when you’re healthy, you get flexible hours, paid holidays, vacations and sick leave. I think its good that grannybunny works, as long as she does enjoy her vacations. You go girl and more power to you!

    • papasan says:

      I don’t think that is correct.  I think whether or not you are taxed on Social Security and how much depends only on your income and not your age.  Also, you will continue to pay into Social Security system as long as you work with little return on that contribution.   Finally, how much you can earn and DRAW Social Security is limited until you reach full retirement age…66 for most folks right now.

    • Wondering says:

      Can you show me where it says that once you turn 67, it doesn’t matter your income, your social Secirity will not be taxed. I know that once you reach full retirement age they know longer take any thing away from social security for money earned but I have never read anything that says once you are 67 they no longer tax any part of social security.

      • HRGuy71 says:

         Retirees who work and collect Social Security benefits at the same time will be able to earn $480 in 2013 before any portion of their Social Security payment will be withheld. 
        Social Security recipients who are younger than their full retirement age (66 for those born between 1943 and 1954) can earn up to $15,120 in 2013, after which $1 of every $2 earned will be temporarily withheld from their Social Security payments. 
        For retirees who turn 66 in 2013, the limit will be $40,080, after which $1 of every $3 earned will be withheld. 
        Once you turn your full retirement age you can earn any amount, without penalty, and collect Social Security benefits at the same time. At your full retirement age your monthly payments will also be adjusted to reflect any benefits that were withheld and your continued earnings.

        • grannybunny says:

          There’s a difference between the penalty imposed by Social Security — withholding benefits — and Federal income taxation.

    • Richard Jefferson says:

       Not true. As per the SSA website:

      “You can get Social Security retirement or survivors benefits and work
      at the same time. But, if you are younger than full retirement age and
      earn more than certain amounts, your benefits will be reduced.”

      Since my full retirement age is 66 and 6 months, I will not have any reduction in benefits. It all depends on when you were born.

    • noquestionspls says:

      If I may clarify.  At full retirement age (67 for you) you may work and earn as much as you want and still receive your full monthly benefit.  You are no longer subject to the Annual Earnings Test, whereby an individual’s SSA benefit may be withheld if they earn over  that years annual allowable earnings amount.  This has ABSOLUTELY NOTHING to do with taxation of benefits.  Strictly with how much you earn and how much SSA retirement you can receive while you are working.

      Taxation is based on your taxable income (which may include things other than just wages or self-employment).  If your income (in accordance with IRS regs) exceeds a certain amount, then you will have to pay income tax on some of your SSA benefits received that tax year.  A person can be completely retired and still pay income tax on their SSA, if their income from other sources is high enough.

      Source: I am a retired Social Security Technical Expert (33+ years).   

      • Bsmar05 says:

        My full retirement age is 66, what I didn’t realize is my retirement pension and my TSP annuity is considered taxable income and is used in the calculation in taxing my Social Security income.  I was thinking and mis-informed that it was based on ‘earnings’ eg working income.  For me, I agree more with grannybunny to work longer just to pay the taxes.  My husband doesn’t have a pension, just social security income, I will work as long as I can and will enjoy my vacations, cruises etc without having the worry about what is going to be cut and what is going to increase.  Majority of my friends are retired, but the single ones retired are working as rehired annuitants and under CSRS.  Being in FERS, I don’t think they made it very easy for people like me to retire financially.

  12. steve5656546346 says:

    Of course, we used to have the option of having all of our tax free money come during the first year or two:  that allowed you to take a significant amount of money out of your IRA/401k/TSP while remaining in a very low tax bracket.

    That was changed long ago, and the reason is clear enough:  they wanted to tax us more.  Lots of us die before the tax free portions are paid out, and the alternative arrangements don’t really solve the problem.

    Moreover, by delaying that tax-free payments…well, do we get interest based upon that delay?  No, we do not.  And inflation reduces the value.

    • payingtoomcuh says:

      The alternative arrangements do solve the problem, but not for the person who has (died) not recovered their full contributions.  If you have no spouse or didn’t leave them an annuity, you estate must file amended tax returns to get all of it back if there is a lot left.
      A lot of people do not know this, nor do they know that the age of your spouse figures into the recovery period. 
       You can thank IRS for this. 
       When this first happened, and before the final decision that this was how they would stick it to us, you needed to file 2 tax returns a year, one reducing your income by the already taxed retirement fund and one without.  I gave up after a few years when it became apparent it was a lost cause trying to fight this.

      • LadyGuest says:

        Correction payingtoomcuh-
        You can thank Congress for this, NOT the IRS.  The IRS only enforces the laws that Congress makes.

  13. kaidamp says:

    This is to grannybunny.
    Why not retire and enjoy some time off.  Life is so short as is to be working after you are 70!

  14. Jhenjoh says:

    “It won’t be until 2017 that Roth TSP accounts will meet the five year rule.”  This only matters if the only Roth account you opened is the TSP Roth. If you opened a Roth earlier with another financial institution, the five years includes the beginning of that account in the calculation. Another way the five year rule does not cause a penalty is if the amount of your withdrawal is less than the basis of what you contributed, i.e. the price of the shares you originally bought was more than what you redeemed them for.

  15. grannybunny says:

    I plan to work 3 1/2 years after I start receiving Social Security at age 70.  Based on the above, 85% of my Social Security will be taxable.  Since I won’t need the Social Security for living expenses prior to retirement, I plan to use it to max out my TSP contributions — including “catch-up” ones — during those 3 1/2 years, to try to lessen the tax hit.

    • Kaidamp says:

      Why work so long, life is too short.  Why not enjoy your time left…

      • grannybunny says:

        I’ve been retirement eligible for the past 2 years, but enjoy working and have a specific financial goal in mind, so plan to work another six years, God willing.

        • OldRet says:

          Right before I retired we had a guy retire who was 70. He was in great shape  (played tennis almost every day) but he just had to work until he got the max CSRS benefit (41 years 11 months). He retired in October and died the following January. More power to you ‘bunny’. I’m glad I retired at 55!

          • grannybunny says:

            Congratulations on your retirement.  Each person’s situation is different.  My Dad was forced to retire at 65, which almost killed him, since he was totally devoted to his work.  He lived another 25 years, during which the cost of living increased so much that by the time of his death, he was almost out of money.  I took 11 years off work — interrupting my prime earning years — to care for him and my Mother during their final years.  I’m working longer to make up for that gap.

          • OldRet says:

            You are so right! We are going through that now with my wife’s 88 year old dad. Sometimes life gets in the way of our hopes, ambitions, and dreams. Good luck to you and good health!

          • grannybunny says:

            Thanks!  Caring for our parents and grandparents can turn out the be the hardest thing we ever do, but it is also the absolutely right thing to do, God’s work.

    • Just Saying! says:

      You are such a fraud — you posted in 1 of your emails that you were already 73 and still working for a government agency.  I challenged you since you post all the time during work hours what government agency do you work for and that you should be investigated using government time with your postings.  Now with the latest posting you are not 70+ years.  Get your story straight! 

      • grannybunny says:

        You — apparently – misunderstood a prior post, all of which, by the way, are done during my designated break times. 

      • Richard Jefferson says:

         Just like 7-11, the government operates 24/7. Just because someone posts when you are working, don’t assume they are working.

    • LadyGuest says:

      Grannybunny, I respect your decision to work so long.  Ignore other “posters” who think that they know what is best for you.

    • happy2retire says:

      Yeah Grannybunny, you need to think about retiring now!  Why are you going to work past 70!  I wouldn’t worry about the taxes.

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