Federal Retirement Tax Strategies (Part 1)
Taxes don’t stop when your federal career ends — in fact, they can become one of the biggest costs you’ll face in retirement. That’s why understanding how taxes interact with your FERS pension, Social Security, and TSP is critical.
This is the first article in a two-part series where we’ll cover 12 key tax items every federal employee should understand. In Part 1, we’ll look at the first six. In Part 2, we’ll dive into the remaining six.
Why Taxes Matter in Federal Retirement
Many federal employees think of retirement in terms of income — their FERS pension, their TSP withdrawals, and eventually Social Security. But what often gets overlooked is that taxes don’t stop when your career ends. In fact, they can become one of the largest and most persistent expenses in retirement.
Here’s why:
- Your pension is taxable. Every monthly check adds to your adjusted gross income.
- Your TSP withdrawals are taxable. They’re treated as ordinary income, just like your salary once was.
- Social Security may be taxable. Depending on your other income sources, up to 85% of your benefit can be taxed.
- Healthcare costs are impacted by taxes. Higher income can trigger IRMAA surcharges on Medicare premiums.
For federal law enforcement officers under FERS, the stakes are even higher. Because you often retire earlier, your retirement horizon is longer. That means your TSP — and the taxes that come with using it — play a bigger role in sustaining your income. Add in the temporary but fully taxable FERS supplement, and tax planning becomes mission-critical.
The bottom line: retirement tax planning isn’t optional. It’s a key part of protecting your income and making your savings last. That’s why this two-part series will walk you through the 12 tax items every federal retiree should understand.
The First Six Tax Strategies Federal Retirees Should Know
🔎 1. All Retirement Income Is Not Taxed the Same
Your FERS or CSRS pension is taxed as ordinary income—so is any withdrawal from the traditional side of your TSP or IRA. Roth withdrawals, on the other hand, are typically tax-free. Capital gains and qualified dividends may be taxed at lower rates.
This mix matters. By understanding how each income source is taxed, we can create withdrawal strategies that help lower your tax bill and stretch your retirement dollars. For example: Use TSP funds now while your tax bracket is low, then pivot to Roth later.
🔎 2. Adjusted Gross Income (AGI) Is the Real Driver
Your AGI—not your taxable income—is the number that determines:
- Whether you’ll face Medicare IRMAA surcharges
- How much of your Social Security will be taxed
- Your eligibility for certain deductions or credits
We focus on managing your AGI across retirement—especially in years when large withdrawals or one-time events could push you over critical thresholds.
🔎 3. Marginal Tax Rate = What You Pay on the Next Dollar
Many federal retirees underestimate how useful this number can be.
Your marginal tax rate tells us what you’ll pay on just one more dollar of income. If you’re currently in the 12% bracket and we know you’ll hit the 22% bracket when RMDs begin, we might recommend filling that 12% space now—through Roth conversions or strategic IRA withdrawals.
Why? Because it’s smarter to pay 12% now than 22% later.
🔎 4. Your Tax Brackets Are Layered Like a Staircase
Federal retirees often ask, “What bracket am I in?” But the better question is: “How much of my income is in each bracket?”
Your income flows through each bracket level (10%, 12%, 22%, etc.). So even if your top rate is 22%, much of your income may be taxed at lower rates. This gives us a chance to structure income thoughtfully—especially when coordinating your TSP withdrawals with Social Security or your pension.
🔎 5. Your “Bracket Buffer” Is Strategic Planning Gold
Let’s say you’re in the 12% tax bracket, and there’s $10,000 of space before you hit 22%. That “bracket buffer” is valuable.
We often use it to:
- Convert traditional IRA or TSP money into a Roth
- Take extra distributions while tax rates are still low
- Reduce future RMDs by “pre-paying” some taxes
Filling this buffer each year can lead to big tax savings over the long run.
🔎 6. Beware the IRMAA Cliff—It’s Steep and Sudden
IRMAA (Income-Related Monthly Adjustment Amount) increases your Medicare premiums if your Modified AGI crosses certain thresholds. For married couples, that first cliff currently starts at $206,000; for single filers, $103,000.
It’s not gradual—go just $1 over the line, and you could pay hundreds more per month.
We plan ahead to help you avoid these sudden jumps. And if crossing the threshold is worth it (say, for a large Roth conversion), we make sure the benefits outweigh the cost.
📝 Quick Actions to Take Now
If you’re preparing to retire from federal service—or already there—here are three practical steps to take:
✅ 1. Request a Free Tax FERS Retirement Analysis
We’ll analyze your most recent return and provide a custom report showing:
- IRMAA exposure
- Roth conversion windows
- Hidden bracket space
- Withholding adjustments (sample below)
✅ 2. Review Your Income Mix
Do you know how much of your income is taxable, tax-deferred, or tax-free? Understanding your income “layers” is the first step to reducing your lifetime tax bill.
Why Tax Planning Is Different for Federal Law Enforcement Officers
ederal law enforcement officers (LEOs) have a retirement path that looks very different from other federal employees — and that makes tax planning more complex, but also more full of opportunity.
- Earlier retirement age. Many LEOs retire in their early to mid-50s. That means you could spend 30+ years in retirement — much longer than the typical federal worker. More years retired = more years of taxable income decisions.
- The FERS supplement. This benefit bridges the gap until age 62, but it’s fully taxable. If not planned for, it can push you into higher tax brackets during a period when you might otherwise have low taxable income.
- Heavier reliance on the TSP. Once the supplement ends, the TSP becomes your primary “bridge” until Social Security begins. Without a strategy, withdrawals can spike your taxable income and create ripple effects like higher Medicare premiums later.
- A unique planning window. The years between LEO retirement and the start of Social Security are a prime time for Roth conversions, bracket management, and smart withdrawals. Few other federal employees have this same window of opportunity.
The takeaway is simple: tax planning isn’t just important for LEOs — it’s essential. With longer retirements, multiple income sources, and unique timelines, proactive planning can mean the difference between paying unnecessary taxes and keeping more of what you’ve earned.
Looking Ahead: Part 2 of Federal Retirement Tax Strategies
This article covered the first six tax items every federal retiree should know. In Part 2, we’ll dive into the next six — including Social Security taxation, charitable giving strategies, and estate planning considerations.
If you’d like a preview of how these strategies come together in real life, take a look at our case study: When DIY Meets Border Patrol Retirement. It highlights what happens when a federal law enforcement officer heads into retirement without a coordinated tax and income plan — and the lessons every FERS employee can apply.
👉 And if you’d like to see how all twelve strategies apply to your own FERS retirement — especially if you’re a law enforcement officer within five years of retirement — let’s talk. [Schedule Your Fit Call] today
Stop overpaying the IRS
We specialize in helping Federal Law Enforcement develop a personalized tax efficient retirement plan.
Do you have one? Let’s find out.
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.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
