Beyond Retirement Planning: What to Know About Taxes and Leaving a Legacy

Apr 6, 2021 | Federal Employee Articles, Newsletter Articles, Retirement

A lot goes into retirement planning, and it is essential to know what other details lie beyond the planning process. Some of those items include taxes on income moving forward and properly planning details regarding the legacy for your estate.

If you are a federal employee and are abou† to enter retirement, you may wonder what income taxes look like moving forward. Unfortunately, income taxes do not go away, but they will change slightly. Federal pensions, Social Security, and Thrift Savings Plan distributions are all taxable. The following is a brief overview of what to expect.

FEDERAL PENSIONS

When you contribute to your pension—whether CSRS or FERS—you are doing so out of already taxed dollars. The good news is that you will never be double taxed on your contributions. However, any government contributions and earnings accrued will be taxed.

SOCIAL SECURITY

Social Security benefits before 1983 were never taxed, but today up to 85% of these benefits can be taxed. The amount that is taxed depends on your provisional income. Factors to determine whether 50% or 85% of your social security income will be taxed depend on your filing status and overall income.

One strategy to avoid a surprise at tax time is to fill out a W-4V form when you apply for Social Security. Because federal income taxes are not withheld automatically, you must request them to be taken out.

THRIFT SAVINGS PLAN

The Thrift Savings Plan is a tax-deferred employer retirement plan and can be either a traditional TSP or a Roth TSP. A withdrawal from a traditional TSP is taxable, while a Roth TSP has contributions where the tax has already been paid. Furthermore, withdrawals from a Roth TSP have no tax as long as they are qualified. A qualified withdrawal means that you are at least 59 ½ years of age, and you have had a Roth balance in your TSP for five years.

It is important to note that there are penalties for withdrawing money too early and too late. Those fees include a 10% early withdrawal penalty, and if you wait too long to start taking distributions, the penalty is 50% of the amount of money you should have taken out. Additionally, if you have both a traditional and a Roth TSP you are not allowed to take separate withdrawals. They must be taken proportionally.

LEAVING YOUR LEGACY

An essential but often overlooked part of financial planning is getting documents in order to plan your estate so your family and relatives don’t end up in a difficult situation. A crucial part of estate planning includes a will which every person should have. It’s a document declaring your wishes for your property and assets after you pass away. Defining how assets and property are distributed and who gets what is critical. Otherwise, a judge will make those decisions.

Another item to consider is a living trust. This document is not public information and can help avoid probate. It essentially works by transferring ownership of your assets to your trust. While you are alive, you control the assets but you are technically not the owner, the trust is. Upon your passing, the ownership of the assets will get transferred to the designated beneficiaries. Depending on the type of trust you elect to have some benefits include shielding your assets from creditors and potentially some tax benefits as well.

HOW DOES YOUR FINANCIAL SITUATION STACK UP?

If you have any questions regarding taxes on your income in retirement or how to properly plan for your estate, then it is time to take a closer look at your financial situation. Retirement may be closer than you think! Schedule an appointment today with Benchmark Financial Group by filling out the form online or calling David Raetz at 913-534-8256 to discuss your financial needs.

“Taxes Federal Employees Will Face in Retirement.” https://www.fedsmith.com/. 13 Jan. 2015.
“Estate Planning for Federal Employees.” https://www.fedsmith.com/. 27 June 2018.
Webinar Video Library

Access our FREE Webinar Library

Every month we discuss the topics that matter most to you in retirement. Get access to all the latest webinars and learn about what you need to know when preparing for retirement. Enter your name and email below, and we'll send access to our Webinar Video Library directly to your inbox.

Success! Check your inbox for your Webinar Library access information.