In real estate, everyone knows the rule: location, location, location. Two identical houses can have very different values simply based on where they’re located. Retirement works much the same way.
Two federal employees can retire with the same pension, the same Thrift Savings Plan (TSP) balance, and the same spending needs—yet experience very different outcomes. The difference often has less to do with how much they saved and more to do with where those savings live and how they’re taxed.
That’s the role of asset location in retirement income planning—and it’s one of the most overlooked decisions federal employees make as retirement approaches.
What Is Asset Location in Retirement Planning?
Asset location refers to where your investments are held across different types of accounts, each with its own tax treatment.
For most federal employees, retirement assets are spread across three primary account types:
- Traditional TSP (tax-deferred)
- Roth TSP or Roth IRAs (tax-free)
- Taxable brokerage or savings accounts
All three may appear on the same net-worth statement, but they behave very differently once you begin taking retirement income. In retirement, where your money lives can matter just as much as how much you’ve saved.
Why Asset Location Matters More as Federal Retirement Approaches
While you’re working, taxes are relatively straightforward: salary comes in, taxes go out.
In retirement, you gain control over how much taxable income appears on your tax return each year, largely based on which accounts you draw from—and in what order.
That control (or lack of it) can affect:
- Your federal tax bracket
- How much of your Social Security is taxable
- Medicare premiums through IRMAA
- How long your retirement assets last
- How confident you feel spending early in retirement
Two retirees with identical pensions and TSP balances can experience very different outcomes simply because their income is structured differently for tax purposes.
A Common Pattern Among Federal Employees
Many federal employees approach retirement with:
- A reliable FERS pension
- A large Traditional TSP balance
- Relatively little in Roth or after-tax accounts
This isn’t a mistake. It’s the natural result of years—often decades—of pre-tax contributions and a focus on maximizing take-home pay during working years.
The issue isn’t how the money was saved. It’s how concentrated taxable income can become later in retirement. When most retirement dollars live in the same tax bucket, every withdrawal carries the same tax consequence.
The TSP Is a Powerful Tool—But It may be Fully Taxable on the Way Out
The Thrift Savings Plan is one of the best retirement savings vehicles available to federal employees, but unless meaningful Roth balances are in place, nearly every dollar withdrawn from a Traditional TSP account adds to taxable income.
Layer that on top of:
- A FERS (or CSRS) pension
- Social Security benefits
- Possible post-retirement income
…and retirement taxes can end up higher—and far less flexible—than many expect.
Asset location isn’t about abandoning the TSP. It’s about avoiding a retirement where you’re forced into the same tax outcome year after year.
Where Asset Location Problems Show Up in Retirement
Asset location issues don’t usually appear in normal, month-to-month retirement spending. They tend to surface when retirement life gets lumpy—when you want to make a larger, one-time purchase or financial decision.
Common examples include:
- Paying cash for a new car
- Making a down payment on a vacation or retirement property
- Helping children or grandchildren
- Taking a bucket-list trip
These aren’t ongoing expenses. They’re larger withdrawals taken in a single year—and that’s where tax trouble often begins.
When most retirement assets sit in tax-deferred accounts like the Traditional TSP, funding a large purchase usually means taking a larger taxable distribution. From a tax perspective, that withdrawal behaves much like a raise did while you were working.
You only see more money to spend. The IRS sees more income to tax.
That “extra” income stacks on top of your FERS pension, Social Security, and any other withdrawals you’re already taking. And just like during your career, more income often leads to higher taxes.
To you, it’s a $100,000 purchase—say, a fully restored 1967 Pontiac GTO. To the IRS, it’s just another $100,000 of income.
Ever seen the 35% tax bracket? You might get a chance now—and you thought you’d be in a lower bracket in retirement.
That’s the disconnect asset location is meant to solve. The spending itself isn’t the problem. It’s how that spending shows up on your tax return when most of your assets live in tax-deferred accounts. With little flexibility in where withdrawals come from, even reasonable retirement purchases can trigger outsized tax consequences.
The Secondary Tax Effects Many Retirees Miss
The impact of large taxable withdrawals often extends beyond your tax bracket. Higher income in a single year can:
- Increase Medicare premiums through IRMAA
- Reduce or eliminate certain tax deductions and credits
- Cause more of your Social Security benefits to be taxed
- Force the sale of other assets, triggering capital gains
None of these consequences are obvious when the withdrawal is made—but they often show up later, when your accountant gives you the bad news.
Why Thoughtful Asset Location Creates Retirement Flexibility
The goal in retirement is to enjoy your money and live your retirement. After decades of saving, spending isn’t the problem. Getting unnecessarily crushed by taxes is.
So, when retirement assets are pre-planned and intentionally spread across tax-deferred, Roth, and taxable accounts, larger expenses don’t have to derail your entire tax picture.
By design, you should have a tax-friendly place to go to make that purchase. Ultimately, thoughtful asset location allows federal retirees to blend withdrawals over different account types.
The real advantage: you can then control how much taxable income shows up in any given year, and that’s what accountants love to hear.
Two Steps Federal Employees Can Take Now
1. Determine Your Taxable-to-Tax-Free Mix
Look beyond your total retirement balance and focus on where your assets are held—traditional (pre-tax), Roth (tax-free), and taxable.
Add up each bucket and assign a percentage.
If more than 90% of your retirement assets are pre-tax, that can be a red flag for future flexibility. It doesn’t mean you’ve done anything wrong—but it does mean most of your future spending will be fully taxable.
Two portfolios with the same value can produce very different after-tax retirement income depending on where the money lives.
2. Determine Your Actual Tax Rate
Taxes often feel like a black box—something only software or an accounting expert can decode. That’s not true. Using free online calculators, you can estimate your average tax rate—the percentage of your total income that actually goes to taxes.
Once you know that number, ask a simple question: Will I need to live on less, more, or about the same in retirement?
Adjust the income level and estimate what your tax rate might look like in retirement. Many federal employees discover:
- They’re already in a lower tax rate than they assumed, and
- Their tax bracket may not change dramatically between their final working years and early retirement
If that’s the case—and you’re heavily weighted toward pre-tax savings—it may make sense to gradually shift toward the tax-free side, not to win on taxes today, but to add flexibility.
Final Thought
The years leading up to retirement are often the last meaningful window to influence asset location. Small, intentional adjustments now can significantly improve retirement tax flexibility later.
No matter if you are 5 years or 5 months from retirement, the steps outlined above will pay dividends. Well, tax dividends at least!
This material is for informational purposes only and should not be considered tax or financial advice. Consult with a qualified tax professional or financial advisor for guidance on your specific situation. Securities, financial planning and advisory services offered through LPL Financial, a Registered Investment Advisor, member FINRA/SIPC.
