FERS Supplemental Annuity is taxed as Ordinary Income.
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How FERS Retirement Annuity Supplement is Taxed
The Federal Employees Retirement System (FERS) provides a retirement annuity supplement to certain federal employees who retire before they are eligible for Social Security benefits. This supplement is a valuable benefit that helps bridge the gap between retirement and Social Security eligibility. However, it is important to understand how this supplement is taxed to effectively plan for your retirement.
The FERS retirement annuity supplement is subject to federal income taxes, similar to other types of income such as wages or pensions. It is important to note that the supplement is not subject to Social Security taxes, as it is not considered Social Security income. However, it is still considered taxable income for federal income tax purposes.
The supplement is calculated based on the number of years the employee has spent in FERS service, and it is designed to approximate the Social Security benefit the employee would have received if they were eligible. This means that the supplement is usually calculated as a fraction or percentage of the employee’s years of FERS service.
The amount of the supplement is determined by taking the number of years of FERS service and multiplying it by the average of the employee’s highest three consecutive years of earnings. This amount is then divided by 40 (the number of years used to calculate the Social Security benefit) to determine the monthly supplement amount.
When it comes to taxes, the FERS retirement annuity supplement is treated as ordinary income. This means it is subject to the same tax rates as other sources of income, such as wages or pensions. The supplement is included on the recipient’s federal income tax return and is subject to federal income tax withholding if the recipient chooses to have taxes withheld from their annuity payments.
It is worth noting that while the supplement is subject to federal income taxes, it may be subject to different rules at the state level. State income tax laws can vary, so it is important to consult with a tax professional or review your state’s tax laws to determine how the FERS retirement annuity supplement is taxed at the state level.
To ensure proper tax planning, it is recommended to consult with a tax professional or financial advisor who specializes in federal employee benefits and retirement planning. They can provide guidance on how to minimize your tax liability and make the most of your retirement income.
In conclusion, the FERS retirement annuity supplement is an important benefit for federal employees who retire before they are eligible for Social Security benefits. While it provides valuable income during the years leading up to Social Security eligibility, it is important to understand that the supplement is subject to federal income taxes. Proper tax planning and consultation with a professional will help ensure that you make informed decisions and maximize your retirement income.
Love your Josh .. but you should get to the point and show graphs and charts so people can follow along. I think some of your video, you make things more confusing than what they are… almost like Govt. trainers do… LOL
I retired at age 43 with 25 years USPS . Under VERA in 2008. Immediate annuity. Not taxable because I retired under special circumstances. Now at age 57 the Supplemental started but it came with income restrictions. So for 2021 I must pay back $978 because I made 22,149 only 18,240 is allowed. It allows me to submit a waiver or show hardship to be eligible not to pay back. I'm a Army trained nurse LPN. It's a shortage so I'm hoping the waiver is granted. Or the hardship of the cost of living to live in Florida.
You criticized the HR personnel & yet you yourself do not know how the Special Retirement System works & how it’s really taxed or you would have discussed it already. So how is it taxed? You don’t know a thing. Just keep on having your dog do the talking.
This info is so helpful for all feds out there! Thanks for the video!
Liers
Oh boy can't wait! Yeesh! Thanks for the heads up Josh! You the man!
The confusion arises from the fact that the FERS Supplement has legal aspects of both the FERS Basic Benefit & Social Security. For income tax purposes it uses the FERS rules. However the Social Security Earning Limit applies. The Supplement is calculated based on your Social Security estimate at age 62, however it's paid by OPM.
This dual legal status is what enabled OPM, several years ago, to change the divorce settlement rules of the Supplement from the Social Security rule that it's benefit is not divisible to the FERS rule that it is divisible.
-Jeff
The social security supplement is paid by OPM, not social security. It is taxed as ordinary income.
Thanks for the clarification. Been busy but trying to keep up.
I live a few miles from West Point, in the Hudson Valley. I have known many people who are counting on FERS. I have asked them lots of questions because I was trying to see how their coverage differs from my NY State and Local retirement. NYSLRS has level upon level of detail, but it is a prance in the park compared to FERS.
Did you get tax forms for your M1 Finance investments? I did not and I had dividends and sold holdings. I have emailed them and no response.
Thanks for this video. I am a FERS retiree with a supplement. Federal Employees unfortunately rely too much on HR for retirement planning. Hiring a fiduciary financial advisor such as yourself is the best option.
Chris has great information. The FERS Retirement Annuity Supplement is calculated off of your Social Security statement as if claiming at 62, but is no way connected to SS (not funded by SS nor will reduce your SS payments).
From what I understand they use the amount that you will receive from S.S.at 62 in the calculation of the supplement. If you retire at your MRA with 30 years of service the supplement is automatically added to your pension check until you reach the age of 62.