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Taxes and Your Federal Employee Retirement

Your contributions to the federal retirement fund are not taxable when the government send this money back to you in the form of an annuity. But you only receive a portion of it back each year. You do not recoup all of your contributions until you have reached your life expectancy.

We are in the early stages of "tax time." Some of us may have already filed our returns, particularly if we are expecting a refund. Others may be waiting until the last minute, either because we owe money, or because we tend to put off doing things we don’t like.

If you’re retired, you already know that most of your CSRS or FERS annuity is subject to federal income tax. If you’re still working, you’ll find it out soon enough. In fact, the Office of Personnel Management will tell you how much of your annual annuity is subject to federal income tax on the form 1099-R that they send you each January.

Our contributions to the retirement fund have been taken out of after tax dollars and we will not have to pay tax on them when we receive them back through our annuity. We do, however, only receive a portion back in each monthly annuity payment. We will not recoup it all until we have reached our life expectancy (as determined by the IRS). Here’s an example of a CSRS retiree. This retiree is 57 years old, with a 56 year old spouse and has elected a survivor annuity.

 

Total Yearly Pension $35,000
Total Retirement Contributions $64,000
Life Expectancy (in months) 360
Amount of monthly annuity derived from own contributions $178
Annual "tax-free" amount $2136
Taxable portion of annuity $32,864

If the retiree dies before recouping the tax-free contributions, the surviving spouse will continue to recoup them. If both die before recovering the contributions, the unrecovered amount will be a tax deduction on the final income tax return. If the contributions are recovered before death, the entire annuity will be subject to federal income tax.

State tax laws vary. The website of the National and Active Retired Federal Employees Association has a list of how each state taxes our annuities. They update the list each filing season. When reading the list, it is important to read the footnotes. For example the 2006 list states that, in Wisconsin, civil service annuities are totally exempt from state taxation. However, the footnote says that the exemption only applies to retirement accounts that were established before 1964.

It is important to note that states cannot impose "source taxes" where they can tax your pension if it was earned while working in their state, even if you reside elsewhere. Former Californians who moved to Nevada are very thankful for this.

Agencies can request to have John Grobe, or another of Federal Career Experts' qualified instructors, deliver a retirement or transition seminar to their employees. FCE instructors are not financial advisers and will not sell or recommend financial products to class participants. Agency Benefits Officers can contact John Grobe at [email protected] to discuss schedules and costs.

About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.