Insight by FEBA
What the One Big Beautiful Bill means for federal employees’ retirement planning
When the dust settled on Capitol Hill and the One Big Beautiful Bill finally passed, most federal benefits emerged unscathed.
September 9, 2025 4:10 pm
5 min read
When the dust settled on Capitol Hill and the One Big Beautiful Bill finally passed, most federal benefits emerged unscathed. While current and prospective federal retirees may have breathed a sigh of relief at that outcome, that doesn’t mean nothing has changed. Other provisions in the bill may affect the way they approach financial planning, and are worth taking into account and discussing with a federal retirement consultant.
Social Security tax changes
Seniors will temporarily be able to deduct more than usual from their Social Security taxes. From 2025 through 2028, people age 65 or older will be able to claim an addition deduction of $6,000 per individual —or $12,000 for married couples — in addition to the standard deduction for seniors, which is $2,000 for individuals or $3,200 for married couples. The amount of the additional temporary deduction phases out for those with a modified adjusted gross income (MAGI) over $75,000, or $150,000 for married couples. It disappears entirely for singles with a MAGI of $175,000 or married couples with $250,000.
It’s important to remember that many retirees will still have to pay taxes on benefits above that amount, so they need to plan their withdrawals and income carefully.
Taxes on retirement income and investments
The One Big Beautiful Bill Act also permanently extends the 2017 lower income tax rates, which means retirees will get to keep more of their investment withdrawals, including Thrift Savings Plan accounts, IRAs and 401(k)s. However, other tax breaks are temporary, which means both current and prospective retirees would benefit from regular consultations with a tax professional — at least as often as once per year. Those tax professionals can help keep current and prospective retirees up to date on the latest information about their investments, and help optimize their strategy to minimize their tax burden. Ultimately, what’s most important is being aware of what changes may affect them, and what doesn’t.
Another tax break that could affect current or prospective federal retirees is the State and Local Tax (SALT) cap. Prior to the One Big Beautiful Bill Act, taxpayers could deduct up to $10,000 of state and local taxes from their federal returns. The One Big Beautiful Bill Act increased that cap to $40,000. However, claiming these deductions does require itemization, which is another thing to consult with a tax professional about.
IRA contribution deductions
Some retirees who feel like their TSP is optimized may choose to also contribute to an IRA. That’s usually a sound investment strategy, but prospective retirees need to be aware of the cap on deductions for those IRA contributions. Federal employees who contribute to a TSP account and make more than $79,000 per year for individuals or $146,000 per year for married couples filing jointly can no longer deduct those IRA contributions from their taxes. That can lead to owing more taxes unexpectedly down the road when that money is pulled out of the account.
Medicare and insurance ripple effects
The Congressional Budget Office estimates that the Medicaid provisions in the One Big Beautiful Bill Act would decrease the number of people with health insurance under Medicaid by 7.8 million in 2034. While most federal retirees don’t qualify for Medicaid, there may be some fallout that current and prospective retirees need to be aware of. For example, the total number of people no longer with health insurance could drive up costs all across the healthcare sector. That could increase the financial burden on Medicare users indirectly, especially those over 60 who may need supplemental insurance or face higher premiums.
Investing on behalf of grandchildren
The One Big Beautiful Bill Act created a new type of investment account, known as Trump Accounts, for children. When parents set up the account for any child born between 2025 and 2028, the government will deposit $1,000 in the account. Parents and grandparents can then contribute up to $5,000 to the account each year. It functions similarly to a 529 plan. Federal retirees with grandchildren may want to consider revisiting their retirement plans in order to take advantage of this opportunity to invest on behalf of their grandchildren.
Planning for the future
As always, current and prospective federal retirees should speak with a certified federal retirement consultant in order to optimize their retirement plan. New legislation like the One Big Beautiful Bill Act will constantly change the retirement horizon, affecting retirees’ calculations. Don’t be caught unawares; regularly revisiting retirement plans is the best way to ensure a comfortable retirement.
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*Disclaimer: This article is not intended to be personal investment advice. These are general concepts and historical data. We cannot make any personal investment recommendations without understanding your personal financial situation, goals, and risk tolerance.
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