Most federal employees assume their tax bracket will fall once they stop working. In reality, many retirees discover the opposite. Their taxable income in retirement often matches or exceeds what they earned during their final working years. This seems counterintuitive, but it happens because of how federal retirement income is structured.

Federal retirees begin with two significant sources of guaranteed income. The first is the Federal Employees Retirement System annuity (FERS annuity). The second is Social Security. Together, these two income streams can fill the lower tax brackets far more quickly than most people expect.

FERS Annuity and Social Security

Consider an employee at the General Schedule grade 14 level (GS 14) earning $120,000 during his final working years. If he retires at age 62 with 30 years of service, his FERS annuity is calculated using the 1.1 percent multiplier, since he is retiring at age 62 or later with at least 20 years of service. This results in an annual benefit of roughly $39,600.

If he claims Social Security at age 62, he may receive around $18,000 to $20,000 per year. Combined, he enters retirement with approximately $58,000 to $60,000 of largely unavoidable taxable income before withdrawing anything from the Thrift Savings Plan (TSP).

Using the 2025 tax brackets for single filers, his FERS and Social Security income fully fill the 10 and 12 percent brackets and push him directly into the 22 percent bracket.

Many retirees are surprised to see how quickly these two income sources fill the lower brackets, even without TSP withdrawals. Married couples benefit from higher bracket thresholds, but the overall pattern remains the same. Once annuity and Social Security income stack together, the lower brackets fill quickly.

If the same employee delays retirement until age 67, the numbers increase meaningfully. 

With additional years of service and a higher high-three salary average, his FERS annuity rises to roughly $44,000 per year. If he claims Social Security at his full retirement age, the benefit may be close to $30,000 per year. 

Now he begins retirement with about $74,000 of taxable income before accessing the TSP. This places him firmly in the 22 percent bracket and approaching the 24 percent bracket depending on filing status.

It is also important to note that up to 85 percent of Social Security benefits may become taxable once combined income exceeds certain IRS thresholds. Many retirees are surprised by how easily they cross these levels once their annuity and investment income are added together.

Medicare and IRMAA

This income also interacts with Medicare. Medicare Part B premiums are based on income through the Income Related Monthly Adjustment Amount (IRMAA).

In 2025, the first IRMAA threshold for single filers begins at $106,000 of modified adjusted gross income. A modest TSP withdrawal could push a retiree above this threshold, increasing Medicare premiums the following year. Most federal retirees do not realize how narrow the IRMAA ranges are.

TSP RMDs

The most significant shift occurs when the TSP becomes subject to Required Minimum Distributions (RMDs). Under current law, RMDs begin at age 73.

Even a moderate TSP balance can produce a significant required distribution. If our GS 14 accumulated $750,000 in the TSP by age 73, his first RMD would be approximately $28,000 based on the IRS Uniform Lifetime Table. This mandatory distribution stacks onto his FERS annuity and Social Security income.

For the retiree who left government service at age 67, these three components produce taxable income of roughly $102,000 per year. This pushes him deeper into the 22 percent bracket and very close to the first IRMAA threshold. A small additional withdrawal or investment distribution could easily raise Medicare premiums.

TSP Withdrawals

Large TSP withdrawals can have an even bigger impact. 

Suppose a retiree wants $35,000 for a major vacation or home project. If taken in a single year, all $35,000 is treated as taxable income. 

Added to his existing income of roughly $102,000, this pushes him to approximately $137,000 of taxable income for the year, well into the 24 percent bracket and above the first IRMAA threshold. Once income exceeds $106,000, Medicare premiums increase above the standard base Part B premium because monthly IRMAA surcharges begin applying. 

In practical terms, a single large withdrawal can simultaneously trigger a higher marginal tax rate and higher Medicare premiums. However, if the same $35,000 is taken in three equal withdrawals over three calendar years, he may remain within the 22 percent bracket and below the next IRMAA tier. The difference often depends more on timing than the total amount withdrawn.

This is why the years between retirement and age 73 create a brief but valuable planning window. During this period, some retirees use partial Roth conversions, strategic TSP withdrawals, or build a taxable investment account to reduce future RMD pressure. These steps can help manage taxable income in later years and reduce the likelihood of landing in a higher tax bracket or a higher Medicare premium tier.

Conclusion

Federal retirement income is not simple or predictable. Retirees enter a multilevel structure where each income source influences the next. The FERS annuity fills the early brackets. Social Security adds another layer. Medicare premiums adjust with income. RMDs push income higher still. This explains why so many federal retirees reach their highest tax bracket after they retire.

Understanding these interactions early allows federal employees to plan ahead. Retirement is not only about estimating expenses. It is understanding how income sources interact with tax rules, Medicare, and withdrawal timing. With thoughtful planning, retirees can manage these layers instead of being surprised by them.

Johnny Medina is Managing Partner at Nhabla, a fiduciary wealth firm serving physicians, federal executives, and other mission-driven professionals. He serves as Portfolio Manager for the firm’s investment strategies and holds a Master of Science in Finance from Johns Hopkins University.

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