The Facts About Taxes In Retirement

A 2022 survey by the Senior Citizens League found that nearly 75% of Americans nearing retirement significantly underestimate the taxes they’ll owe on their retirement income. Even more concerning, almost half mistakenly believe that their Social Security benefits won’t be taxed at all. Since all federal retirement income is subject to federal income taxes, this could lead to an unwelcome surprise.

Up to 90% of Your FERS Pension Is Taxable

Throughout your career, your contributions to the FERS pension were made with post-tax dollars, making your portion of the pension tax-free. However, this only represents a small portion of your annuity. The majority—up to 90% or more—of your annuity is taxable because:

• It includes the government’s untaxed contributions to your retirement.
• It accrues taxable earnings from both your contributions and the government’s.

50% to 85% of Your Social Security Benefits Are Taxable

If your combined income in a given year surpasses IRS thresholds, 50% to 85% of your Social Security benefits will be taxed as income. The current thresholds are:

• For individuals with a combined income between $25,000 and $34,000, up to 50% of benefits may be taxed. Income above $34,000 may lead to up to 85% of benefits being taxable.
• For joint filers with a combined income between $32,000 and $44,000, up to 50% of benefits may be taxed. Income above $44,000 could result in up to 85% of benefits being taxable.

100% of Your Traditional TSP Distributions & Withdrawals Are Taxable

While your tax-deferred contributions to the traditional Thrift Savings Plan (TSP) helped reduce your tax burden during your working years, every dollar you withdraw from your TSP in retirement will be fully taxable.

Additional Taxes to Anticipate in Retirement

• Increasing real estate taxes on your primary and vacation homes.
• Depending on state tax laws, you might owe state income taxes on your annuity, Social Security, and TSP distributions.
• A higher federal tax rate for single filers after the death of a spouse, as single filers generally face higher income taxes than married couples.

Without a solid tax plan for retirement, you might find yourself withdrawing funds from your TSP more quickly to cover what you owe. To get further advice, consult with an FRC^® trained advisor.