All your life, you have paid taxes, and this fact won’t change once you retire. However, the decisions you made regarding retirement planning throughout your career will have an effect upon how your retirement income is taxed.
Federal employees are offered the opportunity to save for retirement using the Thrift Savings Plan (TSP). But the taxes you pay in retirement will depend upon how you previously chose to make contributions to your TSP.
If you chose to make traditional contributions to your TSP, this means that your contributions were taken out of your paycheck before taxes. Throughout your career, you used this strategy to lower your overall taxable income each year, while saving for retirement. Your contributions grew free of taxes as well. But when you begin taking withdrawals in retirement, that income will be taxed as regular income according to your tax bracket.
On the other hand, you might have chosen to make after-tax contributions to your TSP. These are known as Roth contributions, and the rules regarding taxation of withdrawals work the same as rules for all Roth retirement accounts. You made your contributions after paying taxes on your earnings, so when you take withdrawals during retirement, these amounts will not be subject to taxation. This rule only applies if your withdrawals are “qualified”, meaning that the money has been in the account for at least five years, and you have reached age 59 ½.
Before beginning to take withdrawals from your Thrift Savings Plan, discuss your options with a financial advisor who specializes in federal employee retirement. As a federal employee, the rules for withdrawals are a bit different from the typical 401(k) retirement plan. Make sure you’re complying with the rules correctly, so that you can avoid excessive penalties.
