Federal employees enjoy a retirement system that differs somewhat from the norm within the private sector. Whether you’re a new federal employee or a long-time public servant, you know that the FERS system encompasses three forms of retirement income for the future: Your annuity payments, withdrawals from your Thrift Savings Plan, and of course, Social Security benefits.
But since your retirement income is structured a bit different from many retirees, will your income taxes be different in retirement? Possibly, but not necessarily.
It’s important to remember that there are taxable and untaxable forms of retirement income. This issue is a bit more complicated than we can cover in a single blog post, and can differ slightly depending upon your circumstances, but the answer in a nutshell is that yes, your FERS annuity payments can be taxable, and your TSP withdrawals will add to that taxable income each year.
Depending upon your tax bracket, Social Security income can be taxable as well. So the final answer will depend upon your annual income (and the tax brackets as they are defined when you reach retirement one day). If all three forms of income put you above a certain threshold, Social Security benefits can be taxed.
That’s the situation at the federal level. As for state income taxes, it’s important to remember that each state differs in its income tax rules. Some states (37 of them, in fact) do not count Social Security benefits as part of your income, and therefore that amount won’t be taxed. Many retirees actually move to one of those states after their careers are ended, and they are free to live anywhere they choose. Some states do not impose income taxes at all: Florida, Texas, Tennessee, Washington, Wyoming, and Nevada.
The bottom line is that yes, Social Security benefits could be taxed along with the rest of your income, at the federal level. At the state level, it will depend upon your state’s taxation structure. But you will need more individual analysis than we can provide here, to decide exactly what you should expect and what to do about it… So give us a call, and we’ll sit down for a chat to help you understand your own situation in more detail.
