Retirement Tax Planning for Federal Employees

6.27.25: Audio automatically transcribed by Sonix

6.27.25: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Welcome back to the federal retirement Show. I'm your host Val Majewski with American Benefits Exchange. And I really appreciate, as always, you taking the time out of your busy schedule to join us to view our content. I will remind you that we have a lot of other episodes that you can dive into. You can check out. It's all here for you, the federal employee that's looking for honest and accurate information when it comes to your benefits and retirement information. You want answers. We hopefully have an episode that has the information you're looking for. If not, reach out to us. This is something else you can do. You can go to our website Federal retirement show. Com you can fill out the form. One of our experts. If it's not me personally, we'll be reaching out to do a full benefits and retirement review for you and get those questions answered. Also, last thing before we get into today's content. Make sure to subscribe. Get notified when we have a new episode and share this with your colleagues. You work with other federal employees. They need to know this information. They not they may not know that the federal retirement exists, so it is up to us to share that with them. And if you can help us with that mission, that is awesome. So I appreciate you doing so. If you like it, subscribe. Leave a good comment.

Speaker1:
Reach out to us again, all of these great things. But today we're going to be talking about planning for retirement specifically when it comes to to taxes. And we get these questions every now and then about, you know, what are my taxes going to look like in retirement? What's going to be taxed? What's not going to be taxed? What are some of the factors that that contribute to taxes in retirement? And this has to do with your your overall plan for the future, right. We want to make sure that you know all the factors going in, because there have been some misconceptions out there. There have been some false sense of security that we've run into. And talking to federal employees over the years. One of which, and this is a crazy thing that I heard when I first started working with federal employees, was a federal government employee that was looking at retirement, said none of my benefits are going to be taxed because it's all coming from the government. That misconception, unfortunately, may still be out there. I hope it's not. I hope people are are doing their research and looking at things. But that was a big misconception that I saw when I first started, because people thought they worked for the government, they were going to get taken care of. And since they work for the government, all their benefits that they were going to get in retirement were not going to be taxed.

Speaker1:
Big misconception. Hopefully you don't fall into that, that category of thinking. But that's why we're going to go over what we're going to talk about today when it comes to retirement tax planning. So let's dive into today's content. Now what I mean retirement tax planning. There's three parts that people look at when they go into retirement. And the biggest three concerns of what's going to be taxed. So we asked this question, will it be taxed right? Your three main retirement income sources that you have. You've got your first pension. And I know there's CSRs as well, but let's just say most are fers. Uh, it's going to be treated basically the same way their Social Security. I can throw in the first supplement in there as well, but Social Security first supplement and then TSB, we'll talk about a couple of other things outside of this, but let's look at your three main income sources in retirement and see other taxes. Why are we going to talk about planning for this? It's not just giving you the information. Why? Because you may not be holding on to or keeping as much of your money as you think when it comes to retirement, right? You got to plan for this because you're still going to be paying taxes when you retire. That doesn't stop, right? The two commonalities in life the two absolutes death and taxes.

Speaker1:
We're still going to be paying taxes in retirement. Just how much is going to depend on a number of factors? Okay. And let me let me stop there for a second to, one of the factors that's going to determine, you know, some of the taxes we're going to be talking about is where you're living, because what we're going to be talking about today is, is federal tax, right? So I'm just talking about federal tax, not your state tax. This is going to be very state specific here. I live in one of a tax friendly state when it comes to state income taxes. I live in Texas. We don't have any state income tax. So my tax is just federal tax that I owe when it comes to income or things that you're bringing in. Right? So if you're living in one of these states and there are 13 different states that either do not have state income tax or do not charge state income tax on pensions or Social Security benefits, or 401 KS. Right. So do your research. Is your state one of those things? If you have a question about that, reach out to us. We can determine and let you know if your state is one of those states that does not apply state income tax to the things that we're going to be talking about today.

Speaker1:
Now, if you're in one of the states that does not have income tax at all, then great. Awesome. Um, none of this is going to apply on the state level, but we're talking today about the federal level, and this is one that we cannot avoid that entirely on the federal side. So we'll talk about again, first Social Security and first supplement and TSP. First talking about your first simple answer. Will my firs be taxed? Yes, your Firs will be taxed. Uh, the contributions that you make to the first system, however, are taxed. So the money part of it and it's a small portion of it. If you're a Fers employee who's a traditional first employee, only putting in 0.8% of each paycheck. If some of the new legislation passes, it's going to be a lot more right contributions to the first system. But let's say your traditional firs, you're putting in 0.8%. The government puts in a lot more on your behalf to fund your pension. That, uh, portion that is returned back to you is not taxed, but the bulk of it will be taxed. So just in general. Yes. Your first pension will be taxed. So easy to understand. Pension. Yes. To be taxed. There's nothing we can do to avoid that. Unfortunately you can't put it in a place where it's not going to be taxed, uh, on a federal level. So just understand, again, we have to be aware that you will get taxes when it comes to your first pension, social security.

Speaker1:
Now Social Security, we've done an episode on this recently where we talked about this, but Social Security will be taxed to an extent, and this is based on the amount of income that you're going to have in retirement, which portion that will be determined, which portion of your Social Security benefits will be subject to tax. Now, what do I mean by this? Well, it's based on your adjusted gross income, nontaxable interest earned and half of your Social Security benefits. So you add all of that up AGI nontaxable interest earned and half of your Social Security benefits at all of that up. And where do you land? And let's say you're married. Filing jointly. Right. If you earn under $32,000 for the year, adding up all of those incomes that I just talked about, then you're not going to pay any tax federally on your Social Security system. If you're between 32 and 44,000 per year, we'll up to 50% of your Social Security benefits will be taxed. This is not a 50% tax, but it's up to 50% of your Social Security benefits will be subject to federal tax earning more than $44,000 per year. Married filing jointly. Again, that's the category I'm looking at here. Up to 85% of your Social Security benefits could be subject to tax.

Speaker1:
So Social Security, yes, to an extent. If you're under 32 married filing jointly, then there's no tax on Social Security, 32 to 44, up to 50% over 44, up to 85% of your Social Security benefits would be subject to tax. So depends on where you fall in this grand scheme of things. Your total income at that point in retirement will determine what portion of your Social Security will be subject to tax. Tsp, your Thrift Savings plan yes, will be subject to tax. The traditional funds will be taxable. So we've gone over TSP before. You've got two different buckets of money that you can contribute to. You have the traditional bucket right. That's the pretax bucket. Every dollar that goes in there. You don't pay tax on it's tax deferred and you will pay tax in the future. I'll get on that in a second. And then there's the Roth bucket. Roth bucket means you pay tax on the contributions today. Money goes in there hopefully grows with interest. And every dollar that you pull out in the future will not be subject to tax because you've prepaid the tax. Let's go to the traditional bucket. What's going in there? Any money that you elect to put into the traditional bucket, where you go into your pay system and you determine how much you want to have come out of your paycheck. You can tell which bucket you want that money to go into.

Speaker1:
If you choose the traditional bucket, every dollar will be taxed in the future. You get a tax deduction on that today. Your contribution gets a tax deduction. But in the future, every dollar you put in plus interest earned will be subject to tax. Also, it's good to note if you were not aware of this, that all of the government agency matching contributions in TSB go into the traditional bucket. So you might put 100% of your money in the tax free bucket in the Roth bucket. Just understand all the government matching money's going to the traditional bucket. So you will have a taxable portion of your TSP. When it's all said and done, whether you know it or not, it's not. I'm going to put all my money into the Roth, and the government is going to match it in the Roth. That's not true. The government will match the money, but put it into the traditional bucket so you will have a taxable portion. And when it's all said and done. So those are the general things when it comes to what is taxed in retirement. Right. On the federal level, you're first. Yes. The government agency contributions and the money that you're getting for the bulk of the money you're getting is going to be subject to tax, Social Security. Yes, to an extent. I didn't mention the first supplement.

Speaker1:
100% of the first supplement is subject to tax TSP. The money that's in the traditional portion of TSP will be subject to tax. That's your contributions that you've elected to go into the traditional as well as the government agency matching contributions. Those will be subject to federal tax. Now what won't be taxable. Right. What at least can we avoid taxes. And this is called a retirement tax planning for a reason because I'm a big fan. And hopefully you are too. Of paying as little amount of tax as possible. We want to reduce tax liability at least in the future in retirement as much as possible. I want you to keep as much of your own money in retirement as you possibly can. Now, unfortunately, the bulk of your fers we can't do anything about. Right. The bulk of your fers. There's nothing you can really do. That's subject to taxed a little bit, a portion that's kind of a return of your contributions. Yeah that's not taxable. But the bulk of it is going to be subject to tax social Security. There's not much you can do there. Right. The portion of your Social Security that will be subject to tax will be based upon the income that you're earning in retirement. I want you to earn as much money as possible. So my goal is to get everybody, every federal employee to be paying above 85% or at that, that higher level, sorry, not above 85%, but up to that 85% portion, because that means you're making a good amount of money in retirement.

Speaker1:
So there's nothing really we can do there to avoid taxes on our Social Security. If you want to hit your retirement goals income wise. Tsp how can we mitigate taxes there? Well, if you put money into the Roth bucket, yes, you're paying tax on the money today. So you will pay tax on the money, but then the money goes in there. And let's say you work 30 years for the government, and you put in all of your contributions to the Roth portion. Yeah, you're paying tax on that money today. But as that money's growing with interest and it's growing to be a lot larger, a lot larger, a lot larger than the amount that you put in. All that money that you take out in the future will be not subject to tax. It'll come out tax free. So we've had conversations about Roth before, but if you want to mitigate your tax liability in the future, then maybe you're looking at the Roth TSP as a viable option for you. It sounds great today when people say, I get a tax deduction on this, right? I put money into the the TSP traditional bucket and I get a tax deduction on this today. The government is smart.

Speaker1:
They know what they're doing. Uncle Sam's going to get his tax money whether you know it or not or whether you like it or not. And he's going to get it whether it's today or tomorrow. Let's say you put it into the traditional bucket and you you get a tax deduction today right. It's not it doesn't count as taxable today. It reduces your taxable income. But the government knows that you're going to continue to contribute. And the money's going to hopefully grow with interest over time. Now you're going to owe tax on every dollar down the road when you withdraw it. And if you don't withdraw it it goes to your beneficiaries. Well guess what. They're going to pay tax on it. And they're going to have to pay tax within a ten year period because it's going to be considered an inherited IRA. And Uncle Sam's going to get his portion of the pie then. So if you want to eliminate or I shouldn't say eliminate, but at least limit your tax liability in retirement when it comes to your 401 your TSP. Looking at the TSP, Roth could be a good option for you, especially if you're going to be with the government for a long time. You think of the little bit of tax you might have paid on your contributions, compared to the the amount that your account has grown over time, and now you have zero tax on that portion.

Speaker1:
That's awesome. Reminder. You will still have a taxable portion because all the agency matching is going into the traditional bucket. But you can eliminate as much as possible from the tax liability standpoint if you're putting your money in the Roth. Personal preference. I'm just reporting the news. You decide what you want to do there now. How are other ways that's within the government. But how are other ways that you can eliminate or limit taxes in retirement? What kind of accounts will you not pay taxes on in the future? Well, just like a Roth TSB, there are separate Roth IRAs and you can have both. Your Roth TSP allows you to put it up to the limits based on your age and what's allowed into a 401 K or TSP account. Um, right now, if you're under the age of 50, 23,500 is the max. If you're 50 or older, the catch up is 7500. If you're between that that super catch up window of 60 age 60 to 63, you can put in an additional 11,000 to 50, not just the 7500 and catch up, but that's the limit within your TSP. You also can contribute to an outside Roth IRA, which has a limit of 7000 for those under 58,000. If you're 50 and older per year. So that's that's another account where you'll pay tax on the money today.

Speaker1:
But it's all coming out tax free in the end. The money you put in plus the growth. This is the way that you can save more for retirement and have it come out tax free in the end. Another thing that people don't realize, and this is some will call it a super Roth or, you know, the best retirement strategy you've never heard of is utilizing life insurance as a retirement savings vehicle or as a vehicle you can use to save money and have it come out on a tax free basis. Now, this goes back to, uh, rules that were established years ago. Um, because there are earnings limits for people that can contribute to a Roth IRA. So you can only earn up to a certain amount of money in order to be eligible to contribute to a Roth IRA. There are a lot of wealthy people that can't contribute to Roth IRAs, and they want to save money for retirement or for their future, and you'll see them utilizing and I can't, uh, you know, say everybody that you know of utilizes this, but there are stories out there. You can look it up, you can go on Google, you can do your own research on this of of people utilizing cash value life insurance as a way to save money for the future, build cash on a tax free basis.

Speaker1:
Now the plan has to be designed properly in order to maintain the tax free status. And it should be. You should talk to a professional that knows what they're doing in order to do this. But as a supplemental retirement plan, thinking a little outside the box and thinking of a way that you can contribute more, uh, in order to get more, uh, tax free dollars in the future, this is an option, and it has to be a well designed, properly designed, um, life insurance plan in order to maximize it. But in the end, if it's designed properly, the money will come out on a tax free basis, which is awesome. Um, the other thing too, is if you can utilize everything the government gives you and try to plan to eliminate taxes as much as possible, there's only so much that you can put in outside the government if you use a Roth IRA. Right. I mentioned there's an annual limits of 7 or $8000. The reason why people would call the cash value life insurance type of plan a super Roth, is because there is not a limit of how much you can put in. Right. It's not 7 or $8000 a year. It can be a lot more than that. It can be hundreds of thousands of dollars if you want it to be. The idea, though, is you have to design it properly. And oh, by the way, it's life insurance.

Speaker1:
You have to qualify health wise. Those are things that we can talk to you about. But this is an outside the box thinking. And I said some of the best ways that you can save money on a tax free basis outside of what the government already gives you personal preference for everybody, but worth looking into if you didn't know that that option existed. So again, what is not taxable? Your contributions to Firs. Money that you're putting into the TSB Roth bucket. If you have an outside Roth IRA that money's going to come out tax free in the end. And if you have a properly designed cash value life insurance plan, you can utilize that down the road in order to fund your retirement or supplement your retirement, also on a tax free basis. I go back to again, talk to professionals. It's got to be designed properly. So when it comes to retirement tax planning, those are the basics, right? I'm not saying this is the end all be all, but if you want to mitigate taxes as much as possible and I don't know too many people that say, yeah, when I retire, I want to pay more in taxes. When I hear this, when I retire, I want to make more than enough money, and I want to limit or eliminate my taxes as much as possible. These are some things to consider.

Speaker1:
This is a good starting point for you, or at least get the conversation going. So when you talk to that professional, or when you go to our website and fill out that form and talk to one of our experts, you can bring this up and said, yeah, I'm interested in ways in which I can mitigate my taxes. Ways in which I can lower my tax in retirement. How can I do that? I heard about these plans. Can you show me some examples? Please do that because we're here to help. We're not here to make the decisions for you, but we are here to put out all the information so you can make the best decisions possible for you and your family. I really appreciate you taking the time out of your busy schedule to join us today to learn about retirement tax planning. If you have questions, I'll reiterate. Go to our website, fill out the form. It's Federal retirement show. I'll remind you one more time. Share this with a colleague. Let's do this each time. Share this with at least one colleague per week or per episode you watch. If you can do more than that, great. But we just want to get the word out. We want people to be in the know so they can make the best decisions possible. So once again, thank you so much for joining us and look forward to seeing you on a future episode.

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