How to Avoid Taxes on Your Federal Retirement

These are some ways to help federal retirees reduce their tax burdens.

We’ve all heard it. There is nothing we can do to avoid death and taxes, but is that really true?

When it comes to death, I have nothing for you. I have not yet found the fountain of youth but I’ll keep you posted.

But taxes, that one is much more gray. 

While avoiding 100% of taxes is probably not going to happen, there are certainly strategies you can use to decrease your tax burden throughout your retirement. 

Here are some of the best strategies. 

Roth Conversions

Getting money over to an after-tax bucket can be an incredible way to lower your tax bill over time. 

Roth Conversions become even more attractive given the fact that tax rates are most likely going to be going up in the future. This article goes into more depth on when and how to do Roth Conversions. 

Double Up Your Charitable Contributions

If you like giving to charity, this strategy may make a lot of sense for you.

In a nutshell, to use this strategy you simply combine multiple years worth of charitable contributions into a single tax year to maximize your tax deductions. 

So if you regularly give $20k to charity per year, then giving $40k in a single year and $0 in the next year could save you thousands in taxes. 

The reason this works is because the standard deduction is so high. 

In 2022 for married couples, the standard deduction is $25,900. So even if you give $0 to charity you will automatically get a tax deduction of $25,900. This also means that you don’t get any extra tax benefit for giving to charity until your itemized deductions are higher than $25,900. 

Let me run you through an example to show you what I mean. 

Scenario 1

Let’s say you give $20k/year to charity for 2 years but you don’t have enough itemized deductions so you just take the standard deduction for these two years. So your total tax deductions are:

Year 1: $25,900 (standard deduction)

Year 2: $25,900 (standard deduction)

Total: $51,800

Scenario 2

In this scenario let’s say you give $0 to charity in year 1 but give $40k to charity in year 2. Your total tax deductions would be:

Year 1: $25,000 (standard deduction)

Year 2: $40,000 (itemized deduction)

Total: $65,000

In both scenario 1 and scenario 2 you gave a total of $40,000 but scenario 2 gave you $13,200 more in tax deductions just by batching when you give! 

Move To a Low Tax State

One of the simplest (but not always easy) ways to reduce your tax on your retirement income is by moving to a state that doesn’t tax your retirement income. Here is an article that goes over this in depth. 

Qualified Charitable Distributions (QCDs)

When you turn 72, the government requires you start withdrawing money from most retirement accounts (TSP, 401k, Traditional IRAs, etc) and paying taxes on the withdrawal. This is called a RMD (required minimum distribution).

However, if you are charitably inclined you can use a QCD (qualified charitable distribution) to satisfy your RMD without increasing your taxable income at all. 

In a nutshell, instead of taking the RMD personally and owing taxes on the withdrawal, you send the money straight to a charity and avoid taxes completely. 

About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.