Susan is a soon to be federal retiree. She is 70 and will soon be collecting her FERS pension of about $35,000 and her Social Security annuity of about $30,000.
Her Thrift Savings Plan balance is roughly $1 million. She assumes the $1 million will generate a 6 percent return.
Susan saved on the pre-tax basis because she liked the idea of not paying income tax on her TSP contributions and having the earnings generated by those contributions also tax deferred until she takes required minimum distributions (RMDs).
Moreover, like most employees, Susan assumed she will be in a lower tax-bracket during retirement, so investing pre-tax was the way to go. She never realized, however, that when her RMDs kick-in she will have more taxable income in retirement than while working.
Her birthday is after June 30th so her first RMD is at age 71.
| Age | LE Factor | RMD | Year-End Taxable Balance |
|---|---|---|---|
| 70 | 0 | $0.00 | $1,060,000.00 |
| 71 | 26.5 | $40,000.00 | $1,083,600.00 |
| 72 | 25.6 | $42,328.00 | $1,106,288.00 |
| 73 | 24.7 | $44,789.00 | $1,127,876.00 |
| 74 | 23.8 | $47,390.00 | $1,148,159.00 |
| 75 | 22.9 | $50,138.00 | $1,166,911.00 |
| 76 | 22 | $53,041.00 | $1,183,884.00 |
| 77 | 21.2 | $55,844.00 | $1,199,073.00 |
| 78 | 20.3 | $59,068.00 | $1,211,950.00 |
| 79 | 19.5 | $62,151.00 | $1,222,516.00 |
| 80 | 18.7 | $65,375.00 | $1,230,492.00 |
| 81 | 17.9 | $68,743.00 | $1,235,578.00 |
| 82 | 17.1 | $72,256.00 | $1,237,457.00 |
| 83 | 16.3 | $75,918.00 | $1,235,787.00 |
| 84 | 15.5 | $79,728.00 | $1,230,206.00 |
| 85 | 14.8 | $83,122.00 | $1,220,896.00 |
| 86 | 14.1 | $86,588.00 | $1,207,562.00 |
| 87 | 13.4 | $90,117.00 | $1,189,899.00 |
| 88 | 12.7 | $93,693.00 | $1,167,600.00 |
| 89 | 12 | $97,300.00 | $1,140,356.00 |
| 90 | 11.4 | $100,031.00 | $1,108,746.00 |
| 91 | 10.8 | $102,662.00 | $1,072,609.00 |
| 92 | 10.2 | $105,158.00 | $1,031,808.00 |
| 93 | 9.6 | $107,480.00 | $986,236.00 |
| 94 | 9.1 | $108,378.00 | $937,033.00 |
| 95 | 8.6 | $108,957.00 | $884,298.00 |
| 96 | 8.1 | $109,173.00 | $828,183.00 |
| 97 | 7.6 | $108,971.00 | $768,902.00 |
| 98 | 7.1 | $108,296.00 | $706,741.00 |
| 99 | 6.7 | $105,484.00 | $643,661.00 |
| 100 | 6.3 | $102,168.00 | $547,276.00 |
Susan’s core retirement income will be her pension of $35,000 and her Social Security Annuity of $30,000. Both are subject to annual COLAs. She may also have dividends and other passive income. Add on her annual RMD from her TSP account or IRA and she has more taxable income in retirement than when she was working.
Note: Each year’s RMD is larger than the prior year because Susan’s life expectancy is less than the year before.
Susan, therefore, should have been contributing on an after-tax Roth basis to save on taxes.
Joel L. Frank is a retired New York City high school teacher of accounting.
