Is FERS Pension Taxable? A Comprehensive Guide for Federal Retirees

When it comes to retirement, understanding the tax implications of your pension is crucial. For federal employees who are planning to retire under the Federal Employees Retirement System (FERS), one of the most common questions is: Is my FERS pension taxable? Navigating this issue is vital for retirees to plan their finances effectively. In this blog, we’ll explore the taxability of FERS pensions, the different components that make up this pension, and strategies to minimize taxes in retirement.

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What is the FERS Pension?

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The Federal Employees Retirement System (FERS) is a retirement plan designed for most federal employees. It consists of three main parts: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP). Each of these elements plays a role in determining how much a federal retiree will receive upon retirement and how they are taxed.

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• Basic Benefit Plan: This is a defined benefit plan that guarantees a specific monthly payment to retirees based on factors like years of service and salary.
• Social Security: Federal employees who are covered under FERS contribute to Social Security and can expect to receive Social Security benefits in addition to their pension.
• Thrift Savings Plan (TSP): Similar to a 401(k), the TSP is a defined contribution plan where federal employees contribute a portion of their earnings to save for retirement. These funds are invested in a variety of funds and can grow over time, depending on the choices made by the employee.

While the Social Security and TSP components are subject to specific rules and tax rates, the Basic Benefit Plan, which provides the monthly pension payments, is typically the most questioned part when it comes to taxes.

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Is FERS Pension Taxable?

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The short answer is yes, the FERS pension is generally taxable. Since it is considered a type of income, it is subject to federal income tax. However, the exact amount of tax you pay depends on several factors, including your overall taxable income and whether or not you are receiving other benefits like Social Security.

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The taxation of your FERS pension follows similar rules to other pensions. The amount you receive each month is added to your total income, and you pay taxes based on the tax bracket you fall into. It is important to note that while your pension is taxable at the federal level, some states may also tax your pension, while others may not.

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Federal Taxation of FERS Pension

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Your FERS pension is taxed as ordinary income. This means the amount you receive will be added to your other income sources (such as Social Security or TSP withdrawals) to determine your tax liability.

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Federal Tax Rates (Estimated for 2025)

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For most retirees, FERS pension payments will fall under the federal income tax system’s regular tax brackets. The rates for 2025 are as follows:

• 10% on income up to $11,925 (single) or $23,850 (married filing jointly)
• 12% on income between $11,926 and $48,475 (single) or $23,851 and $96,950 (married filing jointly)
• 22% on income between $48,476 and $103,350 (single) or $96,951 and $206,700 (married filing jointly)
• 24% on income between $103,351 and $197,300 (single) or $206,701 and $394,600 (married filing jointly)
• 32% on income between $197,301 and $250,525 (single) or $394,601 and $501,050 (married filing jointly)
• 35% on income between $250,526 and $626,350 (single) or $501,051 and $751,600 (married filing jointly)
• 37% on income over $626,351 (single) or $751,601 (married filing jointly)

Your pension's taxable portion is combined with all other income sources and taxed according to the relevant tax bracket. Therefore, accurately estimating your retirement tax liability requires considering all income streams.

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State Taxation of FERS Pension

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While the FERS pension is taxable at the federal level, state taxation can vary depending on where you live. Some states do not tax pensions at all, while others do. Here are a few examples of how different states treat federal pensions:

• States that exempt federal pensions from state income tax: Florida, Nevada, Texas, Washington
• States that tax federal pensions: California, New York, Pennsylvania

It’s essential to understand how your state treats federal pensions to plan for state-level taxes. If you live in a state that taxes pensions, your FERS pension will be subject to that state’s income tax rules.

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Taxable and Non-Taxable Components of FERS Pension

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While the entire FERS pension is typically taxable, there are a few nuances to be aware of.

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Taxable Contributions

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The FERS pension is funded through a combination of employee contributions and government contributions. Employee contributions to FERS are made on a pre-tax basis. This means that while you are contributing to the plan, those contributions are not taxed at the time of contribution. However, once you begin receiving your pension, the entire amount (including both employee and government contributions) is subject to tax.

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Non-Taxable Portion

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There can be instances where a portion of your pension is non-taxable. For example, if you made after-tax contributions to your FERS plan during your career, a portion of your pension payments may be non-taxable. You’ll need to keep track of any after-tax contributions to determine the exact taxability of your pension payments.

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Social Security and TSP’s Impact on Taxes

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In addition to the FERS pension, many federal retirees also receive Social Security benefits and take withdrawals from their TSP accounts. These sources of income can also impact the overall taxability of your retirement income.

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Social Security

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Social Security benefits are generally taxable, depending on your income. If you receive both a FERS pension and Social Security, the amount of Social Security benefits that are taxable will depend on your combined income (FERS pension, TSP withdrawals, etc.).

In most cases, up to 85% of your Social Security benefits can be taxable if your income exceeds certain thresholds:

• Single taxpayers: If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If your income exceeds $34,000, up to 85% may be taxable.
• Married filing jointly: If your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your income exceeds $44,000, up to 85% may be taxable.

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TSP Withdrawals

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Withdrawals from your TSP account are also generally taxable. TSP funds are contributed on a pre-tax basis, so when you withdraw funds in retirement, those withdrawals will be subject to federal income tax. It’s important to consider the timing of your TSP withdrawals and how they might affect your tax bracket. You can also checkout TSP calculator here.

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How to Minimize Taxes on FERS Pension

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While your FERS pension is taxable, there are strategies to help reduce your overall tax liability in retirement.

1. Consider the Timing of TSP Withdrawals: Be strategic about when you begin withdrawing from your TSP. Withdrawing large sums early in retirement could push you into a higher tax bracket. Spreading out withdrawals over time can help manage your tax bill.
2. Live in a Tax-Friendly State: If you’re considering relocating in retirement, moving to a state that does not tax pensions can save you money. States like Florida, Texas, and Nevada are popular choices for retirees due to their lack of state income tax.
3. Maximize Deductions and Credits: Take advantage of tax deductions and credits available to retirees, such as the standard deduction and medical expense deductions, to lower your taxable income.
4. Consult with a Financial Advisor: The tax situation for FERS retirees can be complex, and it’s worth consulting with a financial advisor to ensure you’re making the most of your retirement income while minimizing taxes.

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Conclusion

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Understanding the taxability of your FERS pension is essential for federal retirees planning for the future. While your FERS pension is generally taxable, with strategic planning, you can minimize the impact on your finances. Factors such as your overall income, state of residence, and how you manage your TSP withdrawals all play a role in determining your tax liability.

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To navigate the complexities of taxes and retirement planning, it’s recommended to consult with a financial advisor. Federal Pension Advisors can help you understand the tax implications of your FERS pension and create a retirement strategy tailored to your needs.

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