When you retire, you will say goodbye to your daily commute, your desk, your alarm clock, and perhaps a few more aspects of your current life. If you’re like most people, you might not miss these things very much!
But there is one thing many of us won’t say goodbye to: Income taxes are still a part of most retirees’ lives. Your tax bracket, and the amount of taxes you pay, might change. But income taxes will still be a factor in your overall financial plan.
How are federal employee retirement benefits taxed? During your career, you pay into your pension on an after-tax basis. Then, in retirement you won’t be taxed on those contributions again. However, you will still owe taxes on the employer contribution part of those benefits, and on the earnings from those contributions. Therefore, some of your pension is taxable, while some is not, and this is all based upon a formula.
In order to discover what part of your pension will be taxable, you will plug information such as your retirement age and the amount of your contributions into this formula. Then you can gain a better understanding of how your benefits will be taxed throughout retirement.
You can choose how these income taxes are paid. Before you retire, you will receive a packet of papers that explain your benefits and allow you to make certain choices. For W4-P gives you the option to have federal income taxes deducted from your pension on a monthly basis. Or, you can wait and pay the taxes due each spring when you file your tax return.
These rules apply to your pension only. In our next blog, we will discuss the different ways in which your Thrift Savings Plan will be subject to income taxes in retirement.
Remember, we specialize in helping federal employees understand their retirement benefits system. So give us a call if you need help with these calculations, or anticipating your potential tax situation in retirement.
