fers retirement classes, federal government retirement seminars

Your Retirement Tax Burden Could Be Larger Than You Think—Especially With Multiple Income Sources

Missy E
November 14, 2025

Key Takeaways

Having multiple income sources in retirement—such as your FERS annuity, Social Security, TSP withdrawals, and outside income—can compound your tax liability in ways that aren’t always obvious at first glance.
Without proactive tax planning, you may find yourself in a higher tax bracket or losing eligibility for deductions and credits you once relied on.

Retirement Isn’t a Tax-Free Zone

There’s a common misconception that once you retire, your tax burdens will decrease significantly. While it’s true that some individuals pay less in taxes during retirement, many public sector retirees experience something entirely different. If your retirement income is coming from more than one source, your tax bill can easily climb higher than you anticipated.

In 2025, more public sector retirees are navigating a retirement landscape that includes:

FERS or CSRS annuity payments
Thrift Savings Plan (TSP) withdrawals
Social Security benefits
Part-time or consulting income
Rental or investment income

Each of these has unique tax implications. And when combined, they can create a tax puzzle that’s far more complex than what you encountered while working.

Understanding the Taxation of Your FERS Annuity

Your FERS annuity is a key component of your retirement income. For tax purposes:

The portion of your annuity funded by your contributions is considered non-taxable.
The portion paid by the government (the majority) is taxable as ordinary income.

You receive a 1099-R form each year, and most retirees find that a large share—often more than 90%—of their FERS annuity is subject to federal income tax.

Keep in mind:

State taxation varies. Some states exempt federal pensions entirely, while others partially tax them or offer no exemption at all.
Survivors receiving benefits under FERS will be taxed under the same general rules.

TSP Withdrawals: Ordinary Income and RMDs

Whether your TSP holds traditional or Roth balances affects your tax liability:

Traditional TSP withdrawals are fully taxable as ordinary income.
Roth TSP withdrawals are tax-free if you meet the qualified distribution rules: you must be age 59½ or older and have held the Roth account for at least 5 years.

Since 2023, required minimum distributions (RMDs) start at age 73 for most retirees. That means if you turned 73 in 2025, you must begin taking RMDs this year.

These mandatory withdrawals add to your taxable income, potentially pushing you into a higher tax bracket and increasing your Medicare premiums due to IRMAA (Income-Related Monthly Adjustment Amount).

Social Security Benefits and the Tax Trap

Social Security income isn’t always taxable—but if you have other income, it likely will be.

As of 2025, if your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits) exceeds:

$25,000 (individual) or $32,000 (married filing jointly), up to 85% of your Social Security benefits may be taxable.

This threshold hasn’t been adjusted for inflation in decades, so more retirees find themselves owing taxes on their benefits.

Adding TSP withdrawals or a FERS annuity to the mix often pushes you over the line.

Working in Retirement Can Complicate Your Taxes

Many public sector retirees take on part-time work, contract positions, or start small businesses after leaving government service. While this can enhance your income and help delay tapping into retirement assets, it can also increase your tax burden in several ways:

Raises your overall taxable income
Increases the taxable portion of Social Security benefits
Triggers higher Medicare Part B and Part D premiums through IRMAA
May disqualify you from tax credits or deductions you previously qualified for

Moreover, self-employment income subjects you to self-employment tax (covering Social Security and Medicare), which can be a surprise if you haven’t planned for it.

State Taxes: Not All Retirees Get a Break

Federal tax rules are only one side of the equation. State taxes can significantly affect your retirement income:

Some states fully exempt government pensions and Social Security benefits.
Others partially exempt certain income types.
A few states fully tax all retirement income.

If you’re planning to move in retirement, don’t assume your new state will be more tax-friendly. Research how it treats each component of your income, from pensions to investment gains.

How RMDs Can Trigger a Snowball Effect

Required minimum distributions don’t just add income—they can set off a chain reaction that elevates your entire tax burden.

In 2025, the IRS requires that you start RMDs at age 73. This amount is calculated based on your life expectancy and the value of your traditional retirement accounts as of December 31 of the previous year.

The impact:

Increases taxable income
Boosts the taxable portion of Social Security
Triggers or increases IRMAA surcharges for Medicare Part B and D
Could result in higher capital gains taxes if investment thresholds are crossed

For some retirees, the RMD alone pushes them into a higher tax bracket—even if their lifestyle and spending haven’t changed.

Don’t Overlook IRMAA and Its Hidden Costs

The Income-Related Monthly Adjustment Amount (IRMAA) affects Medicare Part B and D premiums. It’s based on your modified adjusted gross income (MAGI) from two years prior.

In 2025, retirees with higher MAGI may pay hundreds more per month in Medicare premiums if their income crosses IRMAA thresholds. What’s tricky is that RMDs and capital gains can push you over these lines, even unintentionally.

The IRMAA brackets are updated annually, so keeping your income under control isn’t a one-time strategy—it’s a year-to-year consideration.

Qualified Charitable Distributions: A Useful Strategy at Age 70½

If you’re charitably inclined and at least 70½, a Qualified Charitable Distribution (QCD) from your IRA allows you to donate up to $100,000 annually without counting it toward your taxable income.

While this strategy isn’t available directly from the TSP, you can roll funds into an IRA and then make the QCD.

QCDs can help:

Satisfy RMDs
Lower your taxable income
Avoid IRMAA surcharges

This option should be planned early and done correctly to be effective.

Watch Out for the Tax Torpedo

The term “tax torpedo” refers to the sudden spike in taxes that occurs when modest increases in income cause a disproportionately large portion of your Social Security benefits to become taxable.

This happens because the formula used to calculate taxable benefits is nonlinear. An extra $1,000 in TSP withdrawals might cause $850 more of your Social Security to become taxable, leading to taxation on $1,850 total.

To reduce the risk:

Consider strategic Roth conversions before RMDs begin
Monitor your combined income carefully
Work with a financial advisor who understands public sector retirement rules

Smart Tax Planning Isn’t Optional—It’s Essential

The key to minimizing your retirement tax burden lies in advance planning. You can’t avoid taxes altogether, but you can structure your income to minimize what you owe.

Here are a few strategies worth exploring:

Roth conversions before age 73 to reduce future RMDs
Delaying Social Security to age 70 to increase benefit amount and reduce early tax exposure
Managing withdrawal timing from TSP and other accounts
Using health savings accounts (HSAs) to cover medical costs tax-free if you have one

Tax-smart strategies should be coordinated annually. Your tax situation in 2025 may differ significantly from 2026 if thresholds shift or your income sources change.

Planning Ahead Gives You More Flexibility Later

Tax complexity grows with each additional income source. Whether it’s your FERS pension, TSP distributions, or outside income, every piece affects your overall picture. Waiting until tax season to do the math is a recipe for surprises.

Instead, take the time now to evaluate:

How each income stream is taxed
Whether you’re at risk of IRMAA charges
The timing of your RMDs
How much of your Social Security benefits will be taxed
Whether your state taxes retirement income

You’ve worked decades in public service—your retirement income should work just as hard for you. Avoiding a preventable tax burden means being proactive, informed, and ready to adapt.

Speak with a licensed agent listed on this website to get professional help tailored to your specific retirement situation.