If you’re a federal employee preparing for retirement, you’ve likely spent decades saving into your Thrift Savings Plan (TSP) and counting on your FERS pension. But there’s a critical factor many people overlook: taxes.
When you start withdrawing from pre-tax accounts like the TSP or traditional IRAs, the IRS becomes your silent partner, taking a share of every dollar you withdraw. For many federal retirees, this can mean a higher tax bill, unexpected Medicare costs, and fewer dollars available for the lifestyle they’ve worked hard to achieve.
Let’s look at how one federal couple, Sarah and Mike, used careful planning to make their FERS pension and TSP work more efficiently together.
Meet Sarah and Mike
Sarah (62) and Mike (64) are a federal couple preparing to retire. They’ve built a strong financial foundation:
- $1 million in pre-tax accounts (TSP and IRAs)
- $500,000 in brokerage and savings
- $280,000 combined annual income
- FERS Pension: ~$4,500/month starting at retirement
- Social Security (at age 70): ~$6,700/month combined
They had three goals: maintain their $9,000/month lifestyle in retirement, support charitable causes, and reduce unnecessary taxes.
The Problem
At first glance, their plan seems solid. They had enough savings to continue their $9000/month lifestyle. But when Sarah and Mike ran their numbers, they discovered a potential problem hiding beneath the surface: taxes.
Nearly two-thirds of their savings are in pre-tax accounts, meaning every withdrawal will be taxed as income. Once Sarah’s FERS pension begins (and later when Social Security kicks in), their combined income could push them into higher tax brackets.
By their early 70s, Required Minimum Distributions (RMDs) would make things even worse, forcing them to withdraw (and pay tax on) money they don’t necessarily need. Those higher taxable incomes could also trigger Medicare IRMAA surcharges, raising their premiums by thousands of dollars per year.
All of those potential taxes could impact their goal of supporting charitable causes and possibly threaten their lifestyle goal. In short, their savings plan worked beautifully, but their tax plan hadn’t caught up.
Sarah and Mike faced an important decision about how to handle future withdrawals.
There were several possible paths forward: leaving things as they were, converting everything at once, or taking a gradual, year-by-year approach. Each choice carried its own trade-offs in timing, taxation, and flexibility.
Here is a breakdown of each possible path…
Potential Solutions
Option 1: Do Nothing
Many retirees postpone making any tax decisions, assuming they’ll simply “figure it out later.” For Sarah and Mike, doing nothing could have resulted in a projected lifetime tax bill of over $1 million.
Why? Delaying withdrawals leads to Required Minimum Distributions (RMDs) starting at age 73 or 75, which can cause large taxable withdrawals. Combined with Social Security income (up to 85% of which can be taxable), their total income could push them into a higher tax bracket.
This approach can also trigger IRMAA surcharges, which increase Medicare premiums for higher-income retirees. For many federal employees, that’s an unpleasant surprise.
Option 2: Convert Everything to Roth at Once
Some retirees consider converting their entire TSP or IRA balance to a Roth account in a single year. While this strategy eliminates future taxes, it can also create a very large tax bill today.
If Sarah and Mike converted their entire $1 million at once, they could owe roughly 37% in combined federal and state taxes in that single year. For most federal employees, that level of taxation up front doesn’t make mathematical sense.
Option 3: Strategic Roth Conversions (Sarah and Mike’s Choice)
Instead of waiting too long or paying too much too soon, Sarah and Mike chose a middle ground: strategic Roth conversions.
Starting in 2026, they began converting about $65,000 per year from their traditional accounts to a Roth IRA. This amount kept them below the IRMAA threshold ($206,000 for married couples in 2025).
When their Social Security benefits start in 2032, they’ll slightly increase their annual conversions until 2035, steadily reducing their traditional balances.
Why Option 3 Worked
This strategy worked well for Sarah and Mike because it provided:
1. Manageable Taxes
Converting smaller amounts each year helped them avoid higher tax brackets and overwhelming tax bills.
2. IRMAA Awareness
By staying below IRMAA income thresholds, they may save thousands in future Medicare premiums.
3. RMD Preparation
By reducing the size of their traditional accounts before age 73, they’re likely to have smaller required distributions later, helping to smooth income and reduce future tax exposure.
4. Flexibility and Control
They can adjust conversions each year to match changes in income, expenses, or tax laws, maintaining flexibility without overcommitting.
Key Takeaway
Your TSP and FERS pension are powerful tools, but without tax planning, they can also create unintended tax challenges later.
Strategic Roth conversions, when done gradually and thoughtfully, can help federal employees:
- Manage their tax exposure,
- Stay below Medicare income limits, and
- Maintain flexibility for future spending and giving goals.
Every situation is different, and tax laws can change. Before making any decisions about conversions or withdrawals, consider consulting a qualified financial or tax professional who understands federal retirement benefits.
If you’d like help coordinating your FERS pension, TSP, and overall tax strategy, click the green “Talk with an Advisor” button at the top of this page.
We would be happy to help.
Disclaimer:
This material is for informational purposes only and is not intended to provide tax or legal advice. Always consult with a qualified professional regarding your personal circumstances.
