Taxes and Federal Benefit Reductions

What all Federal Employees should know about taxes and federal benefit reductions. We believe it is important to plan early for your federal retirement. Call (844) 533-3372 for more information.

Taxes and Federal Benefit Reductions

Richard Eller

Many federal employees look forward to the day when they can begin collecting their social security. Perhaps they need or want the extra monthly cash flow due to heavy expenses. Or maybe they fear an early demise and missing the opportunity to receive part of the money they spent years contributing though payroll deductions. Whatever the motivation, it’s worth knowing the facts and consequences of collecting this federal benefit, especially if you still intend to work.

The minimum age to start collecting social security is 62, but there is an earnings test which can significantly decrease your payments.

If you have not reached your “Social Security Full Retirement Age” and start collecting Social Security in 2020, for every $2.00 you earn above $18,240 ($1520/month) your benefit will be reduced by $1.00. Your federal pension income is not included in this calculation. It only includes wage and business income. This reduction also holds true for your FERS Special Supplement. Once you achieve your “Social Security Full Retirement Age”, there are no reductions, regardless of your income.

Critical point: Do not confuse your Social Security FRA with your federal employment minimum retirement age (MRA) (https://www.opm.gov/retirement-services/fers-information/eligibility/)

In the year you reach your “Social Security Full Retirement Age”, you can earn $48,600, without any reduction of benefits. For every $3.00 over that amount, your benefit will be reduced by $1.00.

If you retire & start collecting Social Security before your “Social Security Full Retirement Age”, your payments will be reduced by approximately 6.25% per year for every year you start collecting before your “Social Security Full Retirement Age. Assuming your Social Security FRA is age 66, collecting at age 62 causes a permanent 25% reduction (6.25% x the four years until your FRA). If you started collecting at Age 64, the reduction is 12.5%. It’s not an “all or none” proposition.

If you retire & start collecting at age 70, your payments will be approximately 32.5% more than if you retired & collected at your FRA, again assuming your Social Security FRA is 66. Social Security estimates your monthly benefits will increase 8% each year you delay receiving above your FRA(https://www.ssa.gov/planners/retire/delayret.html)

Ages 78 or 79 is your approximate “Break Even Point”, meaning that if you wait until your Social Security FRA to start collecting, it would take you approximately 12 years to make up the difference of not collecting for those four or five years.

Social Security Taxation

Single Taxpayer: If your “Income” is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your payments. (not a 50% tax). Income for this test includes your “Adjusted Gross Income”, non-taxable interest (municipal or tax-free bond income), and 50% of your Social Security payments.

If more than $34,000, up to 85 percent of your benefits may be taxable (not an 85% tax).

Married filing jointly: If you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits

If more than $44,000, up to 85 percent of your benefits may be taxable.

Critical point: Your income for the purposes of meeting the above criteria includes your Adjustable Gross Income, tax-exempt interest income and half of your Social Security benefits.

TSP Withdrawal Taxation
Unless you are withdrawing money from a Roth TSP, you will be liable for federal taxes on all TSP withdrawals. This is not to be confused with the 10% early withdrawal penalty that exists for TSPs and other 401K type plans.

Pension Taxation
Your federal pension will be taxed to the extent that the government contributions impact your monthly payments (for most federal employees, it’s over 95%). There is no income test.
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Other Notable Social Security Changes in 2020
● COLA was set at 1.6% for your benefit increase amount. 2019 = 2.8%
● 6.25% tax income threshold went from $132,900 to $137,700. (for contribution purposes)
● Age Based Reductions - Social Security Full Retirement Age:
If born in 1958 is now 66 year & 2 Months.
If born in 1960, increases 2 months per year starting in 2021 and increases 2 months a year until it reaches age 67.

DISCLAIMER: This content is for informational purposes only. The views and opinions expressed here are of the author and do not necessarily reflect the opinion of Spire Wealth Management, LLC and its affiliates. There can be no assurance that any investment products or strategy will achieve its investment objective. There are risks associated with investing, including the entire loss of principal invested. Past performance is no guarantee of future results. Investment Advisory Services offered through Spire Wealth Management, LLC. Richard Eller is an Investment Advisor Representative of Spire Wealth Management, LLC operating under Blueprint Financial Group an independent firm.

 

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Taxes and Federal Benefit Reductions | Federal Retirement Benefits Center