Federal retirement expert, Chris Kowalik, provides some practical insight on how federal employees can prepare for income taxes in retirement.
What you will learn:
- Why you likely won’t be in a lower income tax bracket in retirement
- How various benefits are taxed: the CSRS and FERS pensions, survivor benefits, Social Security and the Thrift Savings Plan
- How taxes affect your Federal Employees Health Benefits (FEHB) plan premiums
- An overview of the income taxes in various states
- Why age 62 is an important trigger date regarding income taxes
Listen to the episode or read the transcript below.
Links and Resources:
About Chris Kowalik
Chris Kowalik is a federal retirement expert and frequent speaker to federal employee groups nationwide. In her highly-acclaimed Federal Retirement Impact Workshops, she empowers employees to make confident decisions as they plan for the days when they no longer have to work. Chris’ candid and straightforward nature allows employees to get the answers they need, and to understand the impact these decisions have on their retirement.
Transcript of This Episode
Scott: Hello and welcome to this episode of FedImpact, candid insights on your federal retirement. I’m Scott Thompson with MyFederalRetirement.com and I’m here today with Chris Kowalik of ProFeds, home of the Federal Retirement Impact Workshop. In today’s episode, we’re going to be talking about a topic that’s been in the news a lot recently and that is taxes. Welcome Chris.
Chris: Thanks so much Scott. Great to be here. Yeah, tons of attention on taxes here recently with the tax reform that just passed. So that we’re really clear with all of our listeners, we’re not going to be talking about the new law, so to speak. Our focus on today’s episode is talking about the broader topic of the experience that federal retirees are likely to have with respect to taxes when they’re ready to step into that phase of their life.
Scott: Chris, as we were preparing for this podcast, you had mentioned that there were quite a number of ways that federal employees (or technically retirees) are affected with respect to taxes. What is the best way for us to talk about this pretty broad topic as it applies to the federal benefits that you’re referring to?
Chris: I think the best way for us to do this to make it easy for our listeners is to go through each of these benefits topic by topic and I’ll review the tax implications that maybe they have while they’re working and that in retirement. So how does that sound?
Scott: Yeah, that sounds perfect. So what’s our first topic?
Chris: Perfect. First, I would like to start with a common belief that federal employees have when it comes to taxes. Most often in the retirement workshops that we provide throughout the country, most employees wholeheartedly believe that they will be in a lower tax bracket in retirement than they are right now. And while on the surface I can understand their logic thinking like, “Well, gosh my pay’s going to go down when I’m not drawing a salary and now I’m drawing a pension.” What actually ends up happening with taxes is that most people end up in the exact same tax bracket that they are right before they retire from federal service. That’s I think a big surprise for most people.
Scott: Right. Well, could you give an idea of why they think that they would be in a lower tax bracket?
Chris: So most federal employees think they’ll be in lower bracket because instead of pulling their full salary, now they’re going to be pulling in a pension like I just mentioned and of course, that pension is typically much less than what the salary is that they have today. On the surface it makes sense. But here’s the challenge, the idea of being in a lower tax bracket assumes that they’re not pulling money from any other place and so … Imagine a scenario where we’re at a certain level of salary, we take a pay cut to come down to get the pension but then we fill the gap with money from accounts like the Thrift Savings Plan and Social Security — and the vast majority of all of that money is taxable as well, right? And so it kind of throws things off a little bit.
Chris: In a nutshell, there’s obviously different ways that an employee can be affected by tax, so … with respect to income tax. And so the topics that we’re really cover today with respect to taxes, are the CSRS and FERS pensions, the Survivor Benefits, the Special Retirement Supplement and Social Security, those two go relatively hand-in-hand. Then we’ve got the Federal Employees Health Benefits Program and then of course, the Thrift Savings Plan. Of course, our first big topic today is the CSRS and FERS pension, so let me start there.
Chris: At the federal level the vast majority of the CSRS and FERS pension is taxable. There is an insignificant amount of that pension that is not taxable and I want everyone to know where it comes from, so you know why it is so small.
Chris: So right now when all of our listeners are on a normal bi-weekly pay period, if they were to look at their pay stubs, they’re seeing that a certain percentage of their pay gets contributed to the CSRS or the FERS retirement system. For most of our CSRS employees, that would be 7% of their pay and for most of our FERS employees, that would be 0.8% of their pay. Now for some of those employees that have been hired more recently, say in the last 10 years or so, they may have a higher percentage that they have to contribute. They are called the FERS-RAE and the FERS-FRAE and so certainly if any of our listeners are under one of those two programs, your contribution will be a little bit higher. But whatever the dollar amount is that you put into the retirement system, that money has already been taxed. You didn’t get a tax advantage when you contributed each pay period to CSRS or FERS, like you do maybe for TSP. And so we’ve already paid the tax on the money when it went in, so when it comes out later in the form of a pension, it’s not taxed. But… it’s only that money that the employee put in when it is returned back to them that is not taxable.
Chris: The majority of the federal pension is going to be taxed because the majority of the pension is either the growth on all of that money that the employee contributed to CSRS or FERS, or the agency’s contribution to the CSRS or FERS program on behalf of that employee and all of its growth, and all of those are taxable. When employees think like, “Oh gosh, I already paid the tax when it came in so when that pension comes back to me, it’s tax free.” That is really wrong and it’s kind of an eye opener when we have to explain that in the workshops, so that people can have a realistic view of what that’s really going to look like with respect to their pension.
Chris: Now when OPM gets to the end of the year, we know that every January, that’s when all the tax forms come out. And the form that OPM is going to use to tell the retiree what portion of their pension was taxable and what wasn’t for the prior year, that form is called a 1099-R. Okay, so OPM’s going to do all those calculations for the retiree, but my suggestion to all of the federal retirees out there is to consider the entire pension taxable. Make sure that you’re withholding enough, do not go on this belief that more of the pension is going to be tax-free than it actually is. You do not want to be surprised with a tax bill in retirement. If you think it’s bad while you’re working to get a big tax bill, it’s even worse when you’re retired. So again, that’s the federal level. Let’s go to the state level. Things get a little bit more complicated here because, of course, we have 50 different states. Now there are some retiree-friendly states. In fact, there are nine of that don’t tax anyone’s pension. And then there are nine other states that specifically don’t tax CSRS and FERS pensions because they’ve made a special rule.
Chris: So let’s review the nine states that have no income tax for any of its residents. So therefore, of course, it’s not going to tax the CSRS or the FERS pension. So we have Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington State and Wyoming. So anybody living in these states have absolutely no income tax, so of course their pension is not going to be taxed there. Now if this was the end of the story, that would sound like, “Wow, we should all go live in one of those states because we don’t have any state income tax.” But the reality is that in states that have no income tax, they typically have higher sales tax and property tax. They’ve got to get their revenue somehow and of course this is the way that they’re going to do it. So while on the surface, this sounds really great, there are some consequences with respect to the other kinds of tax that they might experience. Now if we look at the other nine states that are considered retiree friendly, these are states that do have income tax but has specifically excluded the taxation of the entire CSRS and FERS pensions. No matter how high it is, these nine states will not tax it all. So it’s Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Mississippi, New York and Pennsylvania.
Chris: Now in addition to these nine states, there are five states … They give an exemption to a certain amount of the pension and each one of these are different. If any of our listeners live in one of five states, we want to take a look at what that specific state’s rule says. But these states are Kentucky, Michigan, North Carolina, Oklahoma and Oregon. So in this scenario, these states … these 14 states have likely more moderate property tax and sales tax because they’re getting the bulk of the state’s revenue through income tax, but not from federal retirees. This is kind of a little bit of a hybrid and may be worth looking at. Now to be clear, I’m not suggesting that employees or retirees move to one of these special states in retirement. There are so many factors that go into choosing a state that is really most advantageous to live. So hopefully the acknowledgement of these various states helps employees to begin to have this conversations about the tax considerations, where they’re really likely to be retired.
Scott: Right. And a tax question that I get here at MyFederalRetirement.com is, if an employee retires in one state and then moves to another state, which state are they taxed in?
Chris: Oh, that’s a great one and I get that quite a lot too. Generally speaking, a retiree is taxed on the federal pension based on the state in which they live at the time that they receive it. Now there are some minor exceptions and those are determined by the various states. For instance, how long do you have to be present in a particular state in order to claim your residency there, and again that’s different for everyone. So this is typically what triggers you being required to pay state income tax in that state for the given year.
Scott: Okay. Well if we’ve covered everything on the federal pension topic, how about we move on to the Survivor Benefit Plan? Can you share with our listeners regarding that taxation of that benefit?
Chris: Sure. So yeah, the next natural topic is the Survivor Benefit Plan because of course, it’s connected to the pension. Now for those who have listened to the Survivor Benefit Plan podcast episodes, you would know that the Survivor Benefit Plan is a way to protect a portion of the federal pension, the CSRS or FERS pension for the benefit of a surviving spouse. Now a federal employee would begin paying a premium or a cost for this benefit when they retire from federal service. There are two tax implications here and they happen at different moments in time. The premiums that the retiree pays while they’re living are pretax. If say, for instance, we had a pension of a thousand dollars and we had the max survivor benefits selected, it would cost the employee or in this case the retiree, 10% of the pension. So while their pension was a $1,000, they’re only going to get $900, and it’s the $900 that they’re taxed on roughly. They’re not going to be taxed on the $100 that it took to go secure the survivor benefit. That’s a great perk for the survivor benefit program. Now once the retiree dies and the spouse begins to receive the benefit, which is roughly half of the pension, that is fully taxable to the spouse at whatever their tax rate is at the time that they retire … Oh, I’m sorry, at the time that they receive the benefit.
Scott: Okay. Now is there anything that an employee could do ahead of time to change the taxability of the benefit that the spouse receives?
Chris: Well if we’re solely looking inside the Survivor Benefit Plan, like the government version, there’s nothing that can really be done to change the tax obligation that the spouse has when they receive that money. If our listeners are in a position to consider perhaps a life insurance option instead or perhaps maybe a supplement to the Survivor Benefit Plan offered by the government — life insurance proceeds are 100% income tax-free. So whoever is receiving or whoever is the beneficiary of that life insurance program, that all will be tax-free to them. To be fair, the financial planning strategy for the survivor benefit and this alternative or this supplement is far more complex than we can actually cover on this podcast, and so we obviously want to be very careful and make sure that it’s carefully executed so that everyone’s interests are taken into account.
Scott: Right. That’s a good point. We certainly don’t want to make these strategies sound easier than they really are.
Scott: Yeah. Well it sounds as though that’s a really important topic for federal employees who are married to discuss though. Okay. Well our next topic today is the FERS special retirement supplement.
Chris: Yes. The Special Retirement Supplement was designed to bridge the gap between the time an employee retires from FERS (and they’re under 62) — it bridges that gap from that moment in time up until 62 when they would naturally be eligible for Social Security. That’s how the overall program works. Now this benefit is fully-taxable to the retiree. So whatever amount they’re getting each month, it’s going to be fully-taxable. The part that I really want to hit home on the Special Retirement Supplement is something that most people don’t understand how this will really work and this tax snafu that happens. When an employee retires from federal service, their agency does an estimate of their pension and even the Special Retirement Supplement and tells the employee what they should expect once everything’s been sorted out at OPM. But for the next say 9 – 12 months or so, that new retiree cannot expect to get the full payment from OPM. They get these things called interim payments and I won’t bore everyone with the details, we’ve got another podcast where we go over that. But during this interim period where the retiree is receiving a percentage of the actual pension that’s due to them, they will not receive the payment from the Special Retirement Supplement.
Chris: So for some people this can be upwards of $700 to a $1,000 a month that they’re expecting from the Special Retirement Supplement. I mean it’s not small change, it’s a good amount of money. To calm everyone’s fears, I do promise that you’ll end up getting your money when OPM sorts everything out and finalizes or what they call adjudicates the pension. They will look backwards and say, “How many Special Retirement Supplement payments did we miss?”, and they’ll cut you a check. Here’s where the tax problem happens. Let’s say that we have an employee that’s going to retire at the end of this year, so the end of 2018. It is their plan to go ahead and retire December 31st of 2018 and they know for probably a year, they’re not going to get their correct pension during that time. OPM’s got to sort everything out. Here we are at the end of 2019, OPM says, “Hey, great news. We’ve finally figured everything out and we know what your pension is supposed to be, so we’re going to cut you a check.” And they cut the check and it happens in January of 2020.
Chris: In January of 2020, the Special Retirement Supplement, the normal monthly payments start because presumably the retiree is still eligible for them. And so you’ve got this big check, let’s say it’s $10,000 or $12,000 that you received in January of 2020. Now January, February, March, all the way through the end of the year you’re also receiving the monthly payments, the regular monthly payments from the special retirement supplement. At the end of 2020, now you have doubled the tax obligation on that money and it’s all well and good if you’ve remained in the same tax bracket. But if by receiving that extra payment in 2020 versus 2019, it pushes you up into a different bracket, then we have a problem. Now the tax burden is so much higher because we’ve now put ourselves in a … or we didn’t do it, OPM does it by putting them in a higher tax bracket. Now, of course, the Special Retirement Supplement is only payable up until the age of 62. So no planning for this tax issue or these tax snafus really happens after that point, simply because the Special Retirement Supplement will stop at that age of 62.
Scott: Okay. Well now age 62 typically triggers another financial decision, which is Social Security. So what big takeaways for our listeners do you have on this topic?
Chris: Absolutely. So the taxation of the Social Security benefit is … it really throws people into a tizzy. Many years ago when I learned that the Social Security benefits were taxable, I just shook my head. Like how is this possible? It made no sense to me and it doesn’t to most people because we paid taxes, social security taxes so that we had this benefit later, but now it’s all going to be taxed. Right? I mean this just doesn’t really make a lot of sense. Now this is not a matter really of double taxation, that’s not where I’m going with this. What I’m concerned about is that federal employees and others were planning for retirement and they’re not planning for their Social Security benefit to be taxed. They just have never thought about it being taxed in that way, so they may not have put that into the planning equation. That’s really where the planning problem lies with respect to Social Security.
Chris: Now to really understand how Social Security benefits are taxed, we have to look at both the federal and the state level. At the federal level, I promise you Social Security is going to be taxed. Roughly 85% of the benefit that an employee or a retiree receives from social security is taxable. Now given the level of income that federal retirees are going to have with their pension, they can pretty much bank on 85% of the benefit being taxed, of the social security benefit being taxed. Out in the private sector, there are ways to get out of being taxed on Social Security. It takes a lot of tax planning and all of that but federal retirees, given the fact that they have a taxable pension, they can’t avoid this at the federal level.
Chris: Now with states, there are 13 states that specifically do not tax … I’m sorry, 13 states that do tax social security benefits. The vast majority of them don’t, but these 13 do. We have Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Now again, just like in our conversation about states that don’t tax the federal pension, this is not a reason to move to or move out of a given state. It’s just simply something that needs to be considered in the equation so that there are no tax surprises when someone begins drawing their Social Security.
Scott: Well I appreciate how thorough you are when you talk about these different topics Chris, because there’s a lot of others out there that present these things with all kinds of doom and gloom about the choices. And you have a good way to present the issues that helps employees to know what important things they really should focus on as part of their planning efforts, so I thank you for that.
Chris: Well thank you very much Scott. You know in the 10 years or so that I’ve been conducting retirement workshops for federal employees, I’ve found that most of them just want a clear explanation of the consequences, either or good or bad of the decision they’re making. The doom and gloom tactic is typically just meant to scare people and unfortunately, when people are scared about decisions that they’re making, they may begin to feel very overwhelmed. And then they’re afraid of making an even bigger mistake by making a decision and so they choose to do nothing. And that cannot be the answer for our listeners. I hope that these topics and the way that we talk about them in the podcast help them to have clarity and really feel good about the decisions that they’re making.
Scott: Well there’s no doubt about that, Chris. It looks like we have two important topics left. The next one up is the Federal Employees Health Benefits Program.
Chris: Not too long ago, we did a podcast specifically on the health benefits program in retirement. So if our listeners want a deep dive into the FEHB Program, I highly suggest that they listen to that podcast in its entirety. Now today of course, we’re just going to talk about the tax implication of the FEHB Program, but first I need to give a little bit of background so that we all understand kind of where this comes from. While an employee is working, and they are enrolled in one of the FEHB programs, they pay their premiums with pre-tax money.
Again, money that has not been taxed yet out of the paycheck and that money kind of bounces off an employee and goes directly to the carrier. So if it’s Blue Cross or Aetna or Kaiser or any of the programs that are out there. And that’s beautiful, that is a wonderful tax advantage that employees have while they are working. I think you can probably see where I’m going with this. Once they step into retirement, those premiums are no longer paid with pre-tax money, now it’s paid with after-tax money. Let me give an example, let’s say that someone is in the high Blue Cross Blue Shield plan, and I use this as an example because it’s such a popular program, the Blue Cross Blue Shield in its entirety. But this applies to all of them.
If they’re in one of the high plans, let’s say their premium is around $6,000 a year. While they’re working to pay that $6,000, all they need is $6,000 because they don’t need to pay the tax on top of that. They just get the $6,000 on of course a bi-weekly schedule. They get that money and it bounces off of them and goes to Blue Cross and it’s not reported as income, which is beautiful. But if that same program was in place in retirement, meaning we’ve got the Blue Cross Blue Shield plan, the high option and our premium is still about $6,000 a year, all of that is now going to be taxable. In order to pay Blue Cross $6,000, a retiree probably needs $7,000 or $8,000 to do it because they’re going to have the tax obligation above and beyond that premium. So all in all, federal retirees must be prepared to set aside more money to pay the FEHB premiums in retirement because they must also pay the tax on that money that they’re going to use to pay the premium.
Scott: Right. Now is that something you find pretty surprising to federal employees when you discuss this program in your workshops?
Chris: I do, unfortunately. There’s a tremendous lack of information and an abundance of misinformation out there about most of these benefits, not just FEHB, but most of them. So most employees do not understand the tax implication with respect to FEHB when they transition from being employed to being retired.
Scott: Okay. Well we’re on to our final topic of today’s episode, which is the Thrift Savings Plan. Now it seems to me that federal employees have a pretty good sense that the money they take from the TSP is taxable in retirement. Now do you get the same impression, Chris?
Chris: For the most part I would agree with that statement. Most employees know that there’s taxes due on the back end of TSP since they got away with not paying tax when they put the money in. Now there’s still so much misinformation about how this actually works, so let me explain the two different tax sides of the Thrift Savings Plan. A quick recap so that everybody understands how this works. The traditional TSP is paid with pre-tax money. It’s really tax “deferred”. We’re going to pay it, not pay any tax on that money today, but later we know when we take the money out that it’s going to be taxable. Here’s what I think maybe confuses employees a little bit because I see the surprised looks on their faces in our workshops when we explain this. Let’s say that an employee puts in $100,000 into the traditional TSP (over a long period of time), and that $100,00 grows to $200,000. The $100,000 that they used to put in (he principal that they put in to) the traditional TSP was not taxed and they know they have an obligation on that taxable money on the back end when they take the money out. But what most of them don’t understand is that they also owe the tax on all of the growth.
Chris: So if we put in a $100,000, we got a $100,000 tax advantage. Whatever the taxes due on that money would’ve been, but when we take money out, if we were to take all $200,000 either at once or over a long period of time, we owe the tax on the whole bucket. Not just the money we put in but all the growth as well. That’s the first side of TSP, the traditional side.
Chris: The Roth TSP was created in 2012 and it’s paid with after tax money. So you don’t get an immediate tax advantage with the Roth, like you do the Traditional. You go ahead and pay the tax as you contribute to the TSP. So that same $100,000 that you put in, you’ve already paid the tax on the $100,000 and then when it grows in retirement … And this is a really important point for our listeners to see the value of the Roth. When that $100,000 grows to $200,000 and you go to take the money out in retirement, you don’t pay tax on any of it, the principal or the growth. Now there’s an argument to be had for both the Traditional and the Roth. They each have their advantages but I always want employees to recognize what it is that they’re doing today and what the consequence is going to be later.
Chris: So a couple of other important points to mention with the TSP for employees who have both the Traditional and the Roth sides. When you go to pull the money out in retirement, the TSP does not allow you to pick and choose which tax bucket you take the money from. Let’s say we’re in an environment where taxes are really high. We would prefer not to take taxable money during that year, we would rather take tax-free money. And when taxes go low … You know, relatively low (they’re never as low as all of want), but when they go relatively low we don’t mind taking money out of a taxable account and going ahead and paying the tax when it’s on sale. The TSP does not allow retirees to do that. When you take the money out of the Thrift Savings Plan, it is taken proportionally across the two tax advantages, the Traditional and the Roth. If we had a scenario where an employee had 90% of their account that’s Traditional and 10% Roth, when they go to take any money out in retirement, 90% of it’s going to be taxable, 10% is going to be tax free.
Chris: The other that I think is really worth mentioning here are these things called Required Minimum Distributions. And I won’t bore everyone with the IRS details on all of this because it can get a little bit hairy. But ultimately around the age of 70 1/2, the IRS says, “Hey, you need to start taking some of this money so that you can pay the tax on it.” And this … RMDs happen even out in the private sector with traditional IRAs that are taxed just like the Traditional TSP. And it essentially says by the time you get around that age, you’re going to need to take a certain percentage of your account each and every year, so that you can pay the tax on it. In the private sector, Roth IRAs are not subject to a Required Minimum Distribution. Meaning that Roth account that is growing tax-free, can just keep growing and growing and growing and not ever have a time that you have to start taking withdrawals out of it, and that’s why the Roth IRA in the private sector is viewed as a generational program, like a multi-generational. Meaning you can pass it to your children and it continue to grow tax-free beyond that. So there’s never a point that you’re going to have to start taking the money out.
Chris: Unfortunately with the Thrift Savings Plan, the Required Minimum Distribution is across the entire account, even if there’s a Roth portion of the account. That makes this so much less attractive from what it was really intended to do, which is to create two different tax buckets to take the money out of. Of course, the more a retiree takes out of the TSP, specifically the Traditional side of TSP, the more likely it is that they’re back up in that higher tax bracket because they’re taking more income that’s going be fully taxable.
Scott: Right. Okay, so you’ve talked about the tax implication for the TSP for the retiree while they’re living. But are there any special things for our listeners that they should be thinking about with respect to what happens to their TSP money once they’ve passed away?
Chris: Yeah. The TSP has a variety of ways that employees can take money out in retirement. Now based on those different decisions, that will ultimately determine how the beneficiaries may receive the money. The big take away here is that regardless, Uncle Sam is going to get his money, either from the retiree while they’re living or whomever the beneficiaries are. Someone’s going to have to pay the tax on it. The money in TSP hasn’t been taxed yet, at least the Traditional side and so taxes are due from somebody. Now again, that might be the employee or the retiree while they’re still living, or the tax might be assessed at various times from the money that the beneficiaries expecting to receive.
Chris: Now there is a very common beneficiary designation and we’ve talked about this before on one of our podcasts, but it’s so important here that I want to kind of recap for everybody. The very common beneficiary designation that we see is when we name a spouse as a beneficiary. That seems like a normal designation that people would make, but this yields a tremendous tax obligation. I want to take just a moment and explain what this looks like. Let’s say we have an employee who retirees and they have their spouse named as the beneficiary on their TSP. The retiree dies, the spouse gets what they call a beneficiary account. It’s still in the Thrift Savings Plan, the spouse can still decide what funds to be invested in, but they can’t put any more money into the account. Again, this is them leaving it in the TSP in the special beneficiary account. Well, now the spouse wants to name a new beneficiary on the account, so if the spouse dies, she wants maybe her kids to get it. If that’s the case, the spouse names the children on a new beneficiary designation, and then let’s say this spouse dies. The money is now set to go say to the three children. That money coming from the beneficiary account within the Thrift Savings Plan is fully taxable immediately to the children.
Chris: Imagine there being … to give me some easy math, let’s say it’s $600,000 in the TSP and it’s supposed to go to three different children, each one of them is going to get $200,000 that’s going to be taxed in that tax year, all at one time. Imagine we have a child … an adult child making $75,000 a year and they’re used to being in that tax bracket, and then all of a sudden in one year, now it looks like they made $275,000 of income. They’re going to pay an extraordinary amount of tax because they can’t just take a little bit at a time. In the private sector, we don’t see that happening. So this is a big whammy that most employees and spouses don’t even think about in this planning process.
Scott: Now is there anything in particular that could be done to avoid this?
Chris: Well inherently within the Thrift Savings Plan, there’s not a solution to this particular problem, because that’s the way this is structured. When a beneficiary … like in this case the spouse passes, the money has to be distributed to whomever the beneficiaries are … the new beneficiaries are after that point. But in that same scenario, if we were out in the private sector, let’s say the federal retiree names the spouse as the beneficiary. The spouse says, “I would prefer not to leave it in the Thrift Savings Plan. I want to roll it out into an IRA.”, which they have the ability to do. If they name their children as the beneficiary to that IRA, the children can do what’s called a stretch or an inherited IRA, which essentially allows them to spread out the payments that they would receive over many years, so that they don’t have that immediate tax consequence all at one time. So we always stress how important it is that the spouse be involved in these conversations and this really is a great reason why. If the spouse had no idea of the consequences to their decision to leave the money in the TSP and name the children as their beneficiary, how are they going to know to do anything different?
Scott: Right, right. Well we’ve certainly covered a lot today and assuming you don’t have any more whammies for us Chris, do you have any parting words for our listeners today?
Chris: You know my best advice with respect to taxes are to recognize that they’re very real in retirement. I refer to them as the carbon monoxide that can kill an otherwise really good financial plan. We’ve got to have some very serious conversations about taxes and it starts with having those conversations with ourselves. Right. And we’ve got to take the time to really have a tax strategy in place and I hope that a podcast like this helps our listeners to do just that.
Scott: Absolutely. Well it’s always a pleasure to have you with us, Chris. We ask everybody to stay tuned to the FedImpact podcast to get straight answers and candid insights on your federal retirement.
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