Answers to some of your frequently asked questions about federal retirement

One of the ways I decide what to focus on for the topic each week is from the questions and comments we receive from our readers. This week, I wanted to address some of the ones that have been submitted recently. I love getting feedback on this column because I consider it to be “YOUR” column, designed to help you understand your retirement and insurance benefits in a way that will help you plan for a smooth transition to retirement. 

In addition, your questions and comments help me to understand what is confusing to you and allow me the opportunity to provide you with facts vs. fiction regarding the information you may hear from your friends and colleagues.  Sometimes rumors get passed around so much they appear to be factual, after all, how could so many people be wrong? Over the years, I’ve learned to research what I hear employees tell me to make sure I am providing the most up-to-date information. You have probably noticed that I like to provide references to the information in my column so that what is written is not my opinion but based on a law or regulation that guides all your retirement and insurance benefits.The harder part is when there is an agency policy or a union driven benefit that may apply to a smaller group of employees and not all federal employees. Here are some issues that have come to my attention that I felt are worth sharing with you this week: 

Discontinued Service Retirement 

Question: How about an article about Discontinued Service Retirement? I'm not eligible for a full voluntary retirement yet but am close enough that the RIFs terrify me. It looks like if I get fired, I might qualify for a Discontinued Service Retirement. And the benefits look almost the same as if I had taken the VERA. I'd love to get more information about it. HR has not been available.   

Answer:  Here are some recent columns addressing Discontinued Service Retirement: 

Retirement: How to navigate the current chaos 

Too young to retire? What to know about early retirement offers  

Federal retirement planning during uncertain times 

You may also refer to Chapter 44 of the CSRS and FERS Handbook for Personnel and Payroll Offices on this topic.

Here is a video presented by the Army Benefits Center – Civilian that includes information about “involuntary” separations: ABC-C Employee Virtual Benefits Cafe - Early Separations & Non-Voluntary Retirements (May 2024) (DSR 19:50) 

Social Security taxation

Question: Do you know if any agency or group is trying to get taxes on Social Security benefits changed to increase the amount of income allowed before Social Security benefits are taxable. The IRS rules on that have remained the same for about 40 years.   

Answer: Rep. Angie Craig, D-Minn., introduced the “You Earned It, You Keep It Act,” H.R. 7084 on Jan. 25, 2024, which sought to enhance America’s seniors’ financial stability while contributing to the nation’s fiscal health. The bill proposes eliminating all federal taxes on Social Security benefits starting in 2025, a move designed to significantly increase retirees’ disposable income.  

According to Govtrack.US, H.R. 2909, a new version of the You Earned It, You Keep It Act, was introduced on April 14, 2025, and is in the first stage of the legislative process. It will typically be considered by the committee before it is possibly sent on to the House or Senate as a whole. 

President Trump's spending and tax plan, H.R.1 - One Big Beautiful Bill Act, was passed by the House on May 22 by a vote of 215 to 214. While the elimination of taxes on tips, overtime was in this bill, making Social Security tax-free was not. 

Here is some history on the taxation of Social Security benefits: The history of Social Security reflects that a pair of 1938 Treasury Department Tax Rulings, and another in 1941, explicitly excluded Social Security benefits from federal income taxation. This changed for the first time with the passage of the 1983 Amendments to the Social Security Act. Beginning in 1984, a portion of Social Security benefits have been subject to federal income taxes. In 1993, legislation was enacted which had the effect of increasing the tax put in place under the 1983 law. Beneficiaries with modest incomes might still be subject to no taxation at all, or see less of their benefits subject to tax, depending on their overall taxable income.  (You can find a brief historical summary of the development of taxation of Social Security benefits on the Social Security website.)  

According to the IRS, to determine if their benefits are taxable, taxpayers should take half of the Social Security money they collected during the year and add it to their other income. Other income includes pensions, wages, interest, dividends and capital gains. 

• If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable. 

• If they are married filing jointly, they should take half of their Social Security, plus half of their spouse's Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable. 

Legislative Branch Employment 

Question: I spoke with the wife of a client whose paycheck indicates employment with the Congressional Budget Office (CBO). She was under the impression that, because she works for Congress, her pension would be calculated similarly to that of Members of Congress (eligible to retire at 50 with 20+ years of service and using the 1.7% factor to compute the first 20 years). From what I’ve found, these provisions generally apply only to actual Members of Congress. I am unsure if she would qualify for this or would need to retire under “regular” FERS. 

Answer: Under FERS, congressional employees such as those employed by the CBO, are “at-will” employees and as such, they can retire under Discontinued Service Retirement (DSR) provisions at age 50 with 20 years of creditable service or at any age with 25 years. There was a change made in that law in 2012 that created FERS “RAE” and FERS “FRAE” versions of the original FERS retirement coverage which required employees to make larger contributions for retirement. Under “original” FERS, Congressional employees need five years of Congressional service to be vested for the 1.7% calculation factor for the first 20 years of service in the FERS formula with all remaining service computed at 1.0%.  Employees who were first hired after 2012 who are covered under FERS RAE (generally those employees hired in 2013) and FERS FRAE (generally employees hired in 2014 and later), although they can retire under DSR eligibility rules, they no longer are provided the 1.7% factor for the computation of their retirement.  All their federal service is computed using the 1.0% times their high-three average salary times their years and months of service.  If they retire at age 62 with a minimum of 20 years of service, then the 1.1% factor is used, the same as other employees retiring under FERS.   

TSP taxes for residents of New Jersey and Pennsylvania 

Question: I am a 2021 retiree who has invested in TSP. During my employment, New Jersey has taxed my contributions going into TSP over the years. My tax accountant pointed this out to me. I also contacted my HR department while I was working years ago to stop NJ taxes on my TSP Contributions and was told it is mandatory to tax it and my W-2 form for NJ State reflects my total gross income not a reduced income similar to federal. Can you investigate this and get back to me at your earliest convenience. I have not withdrawn any money from my TSP yet but at some point, I will need to, and I'd like to be prepared and not be "double taxed by NJ." 

Answer (from Ed Zurndorfer, EA, ATA, CFP, CLU, ChFC, CCEBS, ChFEBC℠): Those TSP participants who are residents of New Jersey or Pennsylvania who contribute to the traditional TSP are not benefiting from a state income tax deduction when they contribute to the traditional TSP. For example, if Ann was a resident of New Jersey or Pennsylvania, contributing $23,500 to the traditional TSP and a basic salary of $110,000, her federal taxable wages for the year 2025 would be $86,500. But her state taxable wages for the year 2025 are $110,000. That is not good news for a New Jersey or Pennsylvania resident with respect to saving on current year state income taxes. But the good news is that when a retired New Jersey or Pennsylvania resident withdraws from his or her traditional TSP account, he or she will not have to pay state income taxes on the contribution portion of their traditional TSP account. This is because they already paid state income tax on the contributions. 

However, there is an important assumption with regard to a New Jersey or Pennsylvania resident not having to pay state income tax on traditional TSP withdrawals. That assumption is that the traditional TSP participant remains a New Jersey or Pennsylvania resident at the time they withdraw the traditional TSP funds. Suppose they retire to another state, becoming a resident of that state, and they withdraw their traditional TSP funds. If their new state of residence has no income tax (such as Florida or Texas), then they need not worry about paying any state income tax on their traditional TSP withdrawals, however, they never received the tax break on those contributions while contributing as a resident of New Jersey or Pennsylvania. But if they retire to a state that has a state income tax, they will have to pay full state income tax on their traditional TSP withdrawals. They will not be eligible for a state income tax credit from the new resident state on the New Jersey or Pennsylvania income taxes they paid on the contributions. 

There is another tax challenge for New Jersey or Pennsylvania traditional TSP participants who make withdrawals as New Jersey or Pennsylvania residents. The tax challenge is that when they withdraw their traditional TSP accounts when they are retired and living in New Jersey or Pennsylvania, the TSP does not remind them which portion of their traditional TSP withdrawal consists of their contributions made via payroll deduction with after-taxed (state) salary. The TSP keeps a record of such contributions but does not include the information with a 1099-R (the tax document that shows the gross distribution and the taxable distribution of a traditional TSP distribution made during the year). The traditional TSP participant or the participant’s accountant will therefore assume that traditional TSP withdrawals are fully taxable for both federal and state income taxes when in fact the withdrawals are not fully taxable for state income tax purposes.  

The following example is an actual case provided by Zurndorfer of a New Jersey resident (name has been changed) who made a lump sum withdrawal from his traditional TSP account during 2022:

Alexander entered federal service in 2001 as a FERS employee and retired at the age of 60 in 2021 with 20 years of FERS service. During his 20 years of federal service, he contributed each year as much as he could afford, a total of $120,500. All his contributions were made to the traditional TSP. As a New Jersey resident, he benefited from current year tax savings for federal income tax purposes when he contributed to the TSP, but not for New Jersey state income tax purposes. 

Alexander’s traditional TSP account consisted of his contributions made via payroll deduction, his agency’s TSP matching contributions – a maximum 4% match, and an automatic 1% of his gross pay (SF 50) salary automatic contributions, plus accrued earnings over the years. Note that for federal income tax purposes, Alexander’s entire traditional TSP account consists of before-taxed dollars and therefore fully taxable when withdrawn. For New Jersey state income tax purposes, the portion of Alexander’s traditional TSP account that has been subject to New Jersey income taxes (his contributions) and therefore are not taxed again when withdrawn. 

During 2022, when Alexander withdrew from his TSP account, the value of Alexander’s traditional TSP account was $450,000. At the time, Alexander and his wife purchased a vacation home and needed to withdraw $300,000 from Alexander’s traditional TSP account. With a lump sum payment request, the TSP automatically withholds a minimum 20% in federal income taxes, but it does not withhold state income taxes. Alexander knew that the $300,000 TSP withdrawal would push him into a higher federal marginal tax bracket, and he therefore requested 30% in federal income taxes be withheld from the lump sum payment. To “net” $300,000 Alexander requests a gross distribution of $428,571 ($300,000 divided by .70). Alexander had set aside a sufficient amount of liquid assets (savings, money market) to pay the New Jersey state income tax due on the withdrawn money, approximately 8% of $428,571, or $34,286. 

When Alexander had his 2022 federal and New Jersey income taxes prepared, he included with his 2022 tax documents a 1099-R from the TSP showing a gross distribution of $428,571 and a taxable distribution of $428,571 for both federal and NJ state tax purposes, and $128,571 in federal income tax withheld. I reminded Alexander that because he contributed to the traditional TSP as a New Jersey resident his contributions were made with after-taxed New Jersey dollars and therefore he would not have to pay New Jersey income tax on those dollars when withdrawn. 

But to calculate how much of the $428,571 distribution was taxable for New Jersey state income tax purposes, I would need to know how much Alexander contributed to the traditional TSP during his 20 years of federal service. The TSP did not provide that information to Alexander as part of his 1099-R information sent to him in January 2023. Alexander then asked if he should contact the TSP for the information and I said yes. Within a few weeks Alexander received a letter from the TSP showing a breakdown of his traditional TSP account.