Once you have retired from your career as a federal employee, many aspects of your life will become much simpler. You won’t face traffic during your twice-daily commute, you won’t have those awful mornings when you run late and feel harried, and you won’t be living your life according to a clock any longer. These things are true of all retirees.
But one fact of life doesn’t change very much in retirement: You will still owe income taxes. To some extent, your pension will be taxable. Of course, you won’t be paying payroll taxes, such as Social Security and Medicare taxes.
Once you retire, all of your income will be counted as ordinary income. Your taxes will be calculated based upon the marginal tax bracket into which you fall.
Since the money you paid into your CSRS or FERS pension was taken from your after-tax paychecks, you won’t pay taxes on those amounts again. However, you will still pay tax on the employer contribution part of those benefits, and also on the earnings from both your and the government’s contributions. The amount of your pension that is taxable is based upon the age at which you retire and the amount of your contributions.
Therefore, a portion of your federal pension will be tax-free, and you will owe income taxes on the rest. The exact amount of your taxable portion will vary according to the government’s formula, and depending upon your specific circumstances.
When you retire, you will receive a packet of papers. Form W4-P allows you to have your federal income taxes deducted from your pension any way that you wish. You can choose to make monthly payments, or defer the taxes and pay them when you file your tax return in the spring.
Discuss taxes with your tax professional or financial advisor, so that you won’t be surprised once you begin living on a fixed income.
