Your pension. During your working years, you’re contributing to your pension with after-tax dollars. So, since that money has already been taxed, it will not be taxed again in retirement. However, you will be taxed on the government’s untaxed contributions, as well as on any earnings that have accrued.
That sounds simple enough, but you are viewed as recouping your already-taxed dollars over your entire life expectancy. So the end result is that most of your pension actually is taxed. The good news is that the OPM will calculate this tax for you, so all you have to do is decide whether to make payments through the year or in one lump sum. When you retire, you will receive a form W4-P that you can use to make this designation.
Social Security. Social Security benefits can be taxed, based upon your combined income. Your taxable income, half of your Social Security payments, and certain types are tax-exempt income are combined to determine your total taxable income. Then, your Social Security benefits can be taxed based upon the following thresholds:
- No taxes on combined income under $25,000 for single taxpayers or $32,000 for married taxpayers
- 50 percent will be taxable if your income is between $25,000 and $34,000 if single, or between $32,000 and $44,000 if married
- Up to 85 percent can be taxed if combined income is above $34,000 if single, or $44,000 if married
TSP Withdrawals. If you chose a traditional TSP, withdrawals will be fully taxable as regular income. Those who chose a Roth TSP made after-tax contributions, and will enjoy tax-exempt withdrawals in retirement so long as those withdrawals are “qualified”. This means you have reached at 59 ½ and you’ve had a Roth balance in your TSP for at least five years.
Certain other tax rules apply to TSP withdrawals, so you should be careful when making decisions about your account. Let’s stay in touch by scheduling regular consultations throughout your retirement, so that we can help you anticipate and potentially avoid any unpleasant income tax surprises.
