When leaving the workforce, no one wants to worry about how to make ends meet. How much will be deducted? Will the funds be taxed twice? Plenty of myths abound concerning taxation and retirement.
One such myth is that your federal retirement income will be taxed when you make a contribution and then taxed again when it is time to retire. This is actually false. The money contributed into your retirement account is added to your account before taxes, and does not get taxed until you begin to withdraw from your account at retirement age.
Plan Well for Your Retirement with FERS
The Federal Employee Retirement System (FERS) was instituted in 1986. Congress voted and implemented the program by the turn of the next year.
This particular retirement plan has three prongs:
- The first prong is the Thrift Savings Plan, which is an allowance that helps federal employees set aside money for after retirement.
- The second is called the basic benefit—this consists of the monies paid to you after you’ve elected to retire.
- The last component is the Social Security benefit which all employees in the workforce receive.
When using the Thrift Savings Plan, a federal employee must understand that while they are depositing money from their earnings, the agency that they work for will also deposit a specific amount of pay. In most cases, this amount will be about 1% of the basic pay that you earn.
What is CSRS?
CSRS Is the Civil Service Retirement System. It is another way that federal employees can prepare for funding their retirement. CSRS is an older retirement funding system that precedes FERS and was enacted by Congress in 1920. Under this plan, employees can add up to 10% of their earned income as a contribution to this retirement plan.
High Three Average Salaries and Your Annuity
High-three average salaries are used for the first basic annuity when considering retirement. If you are under the age of 62 at the time of retirement, you will get 1% of your high-3 average salary. If you’re older than 62 or have more than 20 years of service, you will get 1.1% of your high-3 average salary.
There are exceptions to these general guidelines. For example, if you are a member of Congress or an air traffic controller, you may get more money contributed to your account. One benefit of this annuity is that it helps protect your income as you wait for your Social Security pay.
What is COLA and How Does It Work?
COLA is also known as the Cost of Living Adjustment. This is a calculation the government uses to ensure that Federal retirees can stop working without fear of inflation. Every year, Congress votes on changes to the program to make sure that it sufficiently fulfills the needs of retirees per the current market.
What Does This Have To Do with Taxation?
Most of the money earned throughout your life is going to add up to a certain number. However, that total may or may not be lower than the contributions put into your retirement savings account. In certain cases, the taxation on your pension income will be lower because you are in a lower income bracket. You will inform the Internal Revenue Service of monies earned on form 1099-R.
Instances where this may not be the case are:
- You have other sources of income. For example, if you have a FERS pension in conjunction with a Thrift Savings Plan and Social Security, this could put you in the same income bracket as if you had just been earning the same amount of income from your employment.
- You are a retired service member. If you are separating from your respective agency and declining the separation package offered to you, you have not agreed to all of the benefits afforded, and you may see changes in your retirement plan.
Your income may be affected and the percentage of money added to your retirement account or monies paid in taxes will change—these changes are dependent on other financial choices you’ve made.
Here are some other tax-relevant things to consider:
- CSRS retirees do not pay social security taxes; they pay Medicare tax, which is currently 1.5% of their income. Depending on the agreement between the agency and the employee, contributions will be set at either 7, 7.5, or 8% of their pay.
- If you are married, your spouse’s income does have an impact on the taxes paid out of your account. Also, keep in mind that the Thrift Savings Plan is inheritable, so if something should happen to you, your beneficiaries will have to plan to adjust their lives accordingly.
- Talk to your accountant, spouse, and all other interested parties to make the best decisions for your future. The more support you can rally, the stronger your decisions will be.
How We Can Help You Plan Your Future
It’s normal to be a little unsure about your financial future after retirement. We can help you learn more about strategizing for financial safety and get advice on which decisions best your fiscal situation. Don’t get stuck—discover the best ways you can prepare for unforeseen changes.
Contact us today to schedule an appointment and plan ahead.