“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||$25,000 to $34,000||Up to 50%|
|Single||Over $34,000||Up to 85%|
|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.