Far too many federal workers don’t take income taxes into consideration when planning their retirement. Some are shocked to find just how much of their monthly FERS/CSRS retirement benefit is subject to federal income taxes.
By now you’re probably wondering how this is possible since your FERS/CSRS contributions were made with after-tax earnings during. No, you won’t be double taxed on your contributions. But you will be tax on the federal government’s contributions and any earnings accrued over time.
Every year, the Office of Personnel Management (OPM) will send you a form 1099-R which lists your total annuity, the taxable portion of your annuity, and your total contributions to your retirement fund.
Keep in mind, for FERS participants, up to 85% of your Social Security benefit is also taxable depending on your income. And don’t forget that the funds you withdraw from your Thrift Savings Plan (TSP) are also considered taxable income. Add to this, depending on your home state, a portion of your retirement income may be subject to state income taxes.
You can’t assume you’ll be in a lower tax bracket when you’re no longer working. In fact, when your various sources of retirement income are combined, it may push you into a higher tax bracket.
That’s why it’s a good idea to work with a FRC℠ certified professional who fully understands your federal benefits. He or she can help you create a strategy designed to lower your tax burden in retirement.