More than 200,000 federal workers are eligible to retire right now. Many are thinking about it because of a major pension benefit change contained in the tax reform bill that has passed the House.
Beginning in July, the change would eliminate the tax-free period for federal workers (and other employes who contribute toward their pensions) after they retire. Under current rules, such persons don't have to pay federal taxes on their pensions -- because their contributions have already been taxed -- until they recover all the money they paid in. For the typical federal employe, that tax-free period lasts about 18 months.
The Federal Government Service Task Force -- the congressional civil service caucus -- estimates that the House-proposed change would mean an unexpected tax bite of $10,000 in the first three years of retirement for the average federal worker, and up to $30,000 for government executives.
Although the Senate still hasn't approved its version of tax reform, many federal workers are nervous that the House bill might become law.
One of the best explanations of the proposed change, its impact, and effective dates is contained in this month's issue of the Foreign Service Journal, written by Bob Beers, legislative director for the American Foreign Service Association. It is complicated, but very, very important if you are a retirement-age fed. Here it is, in part:
"The House bill provides that at the time of retirement the tax deductibility of an employe's retirement contributions would be prorated over that individual's actuarial life expectancy. For example, if the life expectancy was 15 years, the employe could deduct 1/15th of the retirement contribution from taxable income each year for 15 years.
"This new provision would apply to anyone retiring on or after July 1. Practically speaking, however, anyone wishing to avoid being subject to this change must retire by June 3. This is because of a quirk in the law, which provides that if an employe retires by the third of the month, that person will begin drawing a retirement annuity effective the next day. If, however, an individual retires after the third of the month, his retirement annuity begins the first day of the following month.
"The current version of the House tax reform bill would impose the new tax provision on all . . . annuities beginning on or after July 1."
There is no guarantee that the Senate will go along with the House proposal. If it does, there is no guarantee that agreement can be reached on the complicated bill -- with its many other provisions -- by July. Also, there is no guarantee that the president will sign the final version of tax reform approved by the Congress.
That is why it is vital for would-be federal retirees to watch the progress of the tax bill so they won't be caught on the wrong side of any adverse change in rules. Retirees' War Chest
Members of the National Association of Retired Federal Employees have donated an astounding $1,102,974 to NARFE's political action fund since Labor Day. The group -- with 500,000 members -- plans to use a lot of its war chest in this year's congressional races. NARFE officials say that 44,261 members have sent in contributions, averaging $24.92.