For Federal LEOs, Retirement Taxes Are About Location, Location, Location

In real estate, everyone knows the rule: location, location, location.

Two identical houses can have wildly different values simply based on where they’re located.

Retirement works much the same way.

Two Federal employees can retire with the same pension, the same Thrift Savings Plan (TSP) balance, and the same spending needs—yet experience very different outcomes. The difference often has less to do with how much they saved and more to do with where those savings live and how they’re taxed.

That’s the role of asset location in retirement income planning—and it’s one of the most overlooked decisions Federal employees, especially Federal Law Enforcement Officers nearing retirement, make as retirement approaches.

What Is Asset Location in Retirement Planning?

Asset location refers to where your investments are held across different types of accounts, each with its own tax treatment.

For most Federal employees, retirement assets are spread across three primary account types:

• Traditional TSP (tax-deferred)
• Roth TSP or Roth IRAs (tax-free)
• Taxable brokerage or savings accounts

All three may appear on the same net-worth statement, but they behave very differently once you begin taking retirement income.

In retirement, where your money lives can matter just as much as how much you’ve saved.

Why Asset Location Matters More as Federal Retirement Approaches

While you’re working, taxes are relatively straightforward: salary comes in, taxes go out.

In retirement, you gain control over how much taxable income appears on your tax return each year, largely based on which accounts you draw from—and in what order.

That control, or lack of it, can directly affect:

• Your federal tax bracket
• How much of your Social Security is taxable
• Medicare premiums through IRMAA
• How long your retirement assets last
• How confident you feel spending early in retirement

Two retirees with identical pensions and TSP balances can experience very different retirement outcomes simply because their income is structured differently for tax purposes.

A Common Pattern Among Federal Employees (Especially LEOs)

Many Federal employees—particularly Federal Law Enforcement Officers—approach retirement with:

• A strong pension
• A large Traditional TSP balance
• Relatively little in Roth or after-tax accounts

This isn’t a mistake. It’s the natural result of decades of pre-tax contributions, earlier retirement eligibility for LEOs, and a focus on maximizing take-home pay during demanding working years.

The issue isn’t how the money was saved.
It’s how concentrated taxable income can become later in retirement.

When most retirement dollars live in the same tax bucket, every withdrawal carries the same tax consequence.

The TSP Is a Powerful Tool—But It’s Fully Taxable on the Way Out

The Thrift Savings Plan is one of the best retirement savings vehicles available to Federal employees.

But unless meaningful Roth balances are in place, nearly every dollar withdrawn from a Traditional TSP account adds to taxable income.

Layer that on top of:

• A FERS pension
• Social Security benefits
• Possible consulting or post-retirement income

…and retirement taxes often end up higher—and far less flexible—than expected.

Asset location isn’t about abandoning the TSP.
It’s about avoiding a retirement where you’re forced into the same tax outcome year after year.

Where Asset Location Problems Show Up in Retirement

Asset location issues don’t usually appear in normal, month-to-month retirement spending.

They tend to surface when retirement life gets lumpy—when you want to make a larger, one-time purchase or financial decision.

Common examples include:

• Paying cash for a new car
• Making a down payment on a vacation or retirement property
• Helping children or grandchildren
• Taking a bucket-list trip, such as a river cruise

These aren’t ongoing expenses. They’re larger withdrawals taken in a single year—and that’s where tax trouble often begins.

When most retirement assets sit in tax-deferred accounts like the Traditional TSP, funding a large purchase usually means taking a larger taxable distribution. From a tax perspective, that withdrawal behaves much like a raise did while you were working.

You take a withdrawal.
The IRS sees more income.

That income stacks on top of your pension, Social Security, and any other TSP withdrawals you’re already taking. And just like during your career, more income often leads to higher taxes.

To you, it’s a $100,000 purchase—say, a fully restored 1967 Pontiac GTO.
To the IRS, it’s just another $100,000 of income.

Ever seen the 35% tax bracket?
You might get a chance now—and you thought you’d be in a lower bracket in retirement.

That’s the disconnect asset location is meant to solve. The spending itself isn’t the problem. It’s how that spending shows up on your tax return when most of your assets live in tax-deferred accounts. With little flexibility in where withdrawals come from, even reasonable retirement purchases can trigger outsized tax consequences.

The Secondary Tax Effects Many Retirees Miss

The impact of large taxable withdrawals often extends beyond your tax bracket.

Higher income in a single year can:

• Increase Medicare premiums through IRMAA
• Reduce or eliminate certain tax deductions and credits
• Cause more of your Social Security benefits to be taxed
• Force the sale of other assets, triggering larger capital gains

None of these consequences are obvious at the time the withdrawal is made—but they often show up later, all at once.

Why Thoughtful Asset Location Creates Retirement Flexibility

When retirement assets are intentionally spread across tax-deferred, Roth, and taxable accounts, larger expenses or one-time purchases don’t have to derail your entire tax picture.

The goal in retirement is to enjoy your money and actually live your retirement. After decades of saving, spending is not the problem.
Getting unnecessarily crushed by taxes is.

Thoughtful asset location gives Federal retirees the ability to:

• Blend withdrawals across different account types
• Control how much taxable income shows up in any given year
• Fund meaningful retirement goals without unnecessary tax drag

That flexibility is what allows retirees to say “yes” to opportunities—without worrying about tax surprises later.

Two Steps Federal Employees Can Take Now

1. Determine Your Taxable-to-Tax-Free Mix

Look beyond your total retirement balance and focus instead on where your assets are held—Traditional (pre-tax), Roth (tax-free), and taxable.

Add up each bucket and assign a percentage.

If more than 90% of your retirement assets are pre-tax, that can be a red flag when it comes to future flexibility. It doesn’t mean you’ve done anything wrong—but it does mean most of your future spending will be fully taxable.

Remember, two portfolios with the same total value can produce very different after-tax retirement income, depending entirely on the type of accounts the money lives in.

2. Determine Your Actual Tax Rate

Taxes often feel like a black box—something only sophisticated software or an accounting wizard can truly understand. That’s not the case.

Using any number of free online calculators, you can estimate your average tax rate—the percentage of your total income that actually goes to taxes.

Once you know that number, ask a simple question:
Will I need to live on less, more, or about the same in retirement?

Adjust the income level accordingly and estimate what your tax rate might look like in retirement.

This exercise is useful for two reasons:

First, many people discover they’re already in a lower tax rate than they assumed.
Second, for many Federal employees, tax brackets don’t change dramatically between the final working years and early retirement.

If that’s the case—and you’re heavily weighted toward pre-tax savings—it may make sense to gradually shift contributions toward the tax-free side.

You’re not trying to win or lose on taxes today.
You’re trying to add flexibility to your asset location—and that flexibility is often what allows retirees to manage taxes more effectively over time.

The years leading up to retirement are often the last meaningful window where Federal employees—especially LEOs—can influence asset location.

Small, intentional adjustments during this period can significantly improve retirement tax flexibility later.

How We Help Federal Employees Prepare—Without Guesswork

For the Federal employees we work with, retirement income planning isn’t based on assumptions or rules of thumb.

Our GS Retirement Planning Process incorporates comprehensive tax planning, designed to help clients approach retirement with both the right assets and the right asset location.

We coordinate:

• Pensions, TSP withdrawals, and Social Security
• Year-by-year income modeling in after-tax dollars
• Tax-sensitive decisions before retirement begin

Want to know more–just click here to schedule a no-strings attached consultation to see if you Asset Location needs improvement!

With over 21 years of experience as a financial planner, author and educator, Anthony Bucci helps Federal Law Enforcement prepare for retirement and  ‘cut through the noise’ and make decisions free from opinion, emotion and conjecture.

Tony is also a frequent contributor on FedSmith and you can read more of Tony’s wisdom for Federal Employees HERE.

Final Thought

In retirement income planning, location matters.

Not where you live—but where your money lives.

For Federal employees approaching retirement, especially Federal Law Enforcement Officers within five years of retirement, understanding that distinction can make a meaningful difference in how retirement actually feels.

This material is for informational purposes only and should not be considered tax or financial advice. Consult with a qualified tax professional or financial advisor for guidance on your specific situation.

Securities, financial planning and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA / SIPC