Understanding Resignation Milestones for Federal Employees

Resigning from a job is quite a journey, marked by some important turning points that can really affect things like your financial security, health benefits, and overall well-being. If you’re a federal employee contemplating resignation this year, it’s vital to grasp these key ages and deadlines.

Last week, we highlighted significant ages that relate to Social Security and Medicare. This week, let’s shift our focus to the deadlines for your savings plans and some key milestones concerning FERS basic retirement benefits.

50 Years Old: Starting TSP Catch-Up Contributions

When you hit 50, it marks a great opportunity to ramp up your savings in the TSP retirement accounts. The IRS allows those over 50 to make “catch-up” contributions to tax-advantaged accounts like TSPs, 401(k)s, and IRAs.

If you exceed the IRS’s selective deferral limit in the year you turn 50, your contributions will start to count towards the catch-up limit, which will be $7,500 in 2025. You just add those contributions to the same spot where you make your usual TSP contributions, giving your retirement savings a solid boost as you approach the final years of employment.

IRAs: Contribution Limits and Rules

For traditional IRAs in 2025, the contribution limit will be $7,000, with a catch-up contribution limit of $1,000 remaining unchanged for those over 50. If your income allows, you’re entitled to contribute to a traditional IRA without income limits. However, if you or your spouse are part of an employer’s retirement plan, how much you can deduct from your taxable income for a traditional IRA will depend on your modified adjusted gross income (MAGI) and your tax situation.

As a side note, keep in mind that any annual leave payment you receive in a lump sum after resigning on December 31st is considered deferred compensation and will be counted as income for the following year.

55 Years Old: Penalty-Free TSP Withdrawals

When you turn 55 and leave your job, retirement plans like TSP and 401(k)s allow for penalty-free withdrawals, often referred to as the “rule of 55.” You can pull from your current employer’s plan without penalties (though regular income tax will still apply) if you separate from service in the year you turn 55 or afterward. This can be a useful way to bridge any income gaps until you start receiving Social Security or other retirement funds.

For retired public safety officers, including federal law enforcement and firefighters, TSP distributions are available without penalties at an earlier age as defined in specific regulations.

Age 60 and Beyond: Understanding Benefits

• At 60, for example, Janet has a 20-year career with an average high salary of $100,000, earning $20,000 yearly or about $1,666 monthly.

• At 61, her benefits rise to $21,210 yearly, or roughly $1,767 monthly, following 21 years of service.

• By 62, her earnings could reach $24,684 annually, equating to $2,057 monthly, after 22 years in service.

The income difference between ages 60 and 61 is about $101 monthly, while the jump from 61 to 62 is $290 a month, mainly due to the high average salary consideration.

Additionally, if Janet had spent 20 years in the private sector before her federal service, her special retirement supplements for ages 60 and 61 wouldn’t reflect her previous private-sector wages. At age 62, her Social Security benefits will be calculated using her highest 35 years of wages, typically exceeding her FERS supplements.

73 Years Old: Minimum Required Distributions (RMD)

Once you reach 73, tax-advantaged retirement accounts like traditional TSPs, IRAs, and 401(k)s require you to start taking minimum distributions annually. Not doing so can lead to hefty IRS penalties. It’s worth noting that distributions from Roth accounts don’t count toward RMDs since Roth funds aren’t subject to these rules. Crafting effective withdrawal strategies can help in minimizing taxes while meeting annual requirements.

Conclusion: Navigating Retirement Milestones

Each of these ages marks a significant point in your retirement journey and opens up new financial strategies, benefits, and considerations. The rules governing retirement accounts and benefits like Social Security and Medicare are intricate and can change, so staying informed is critical.

Paying attention to these milestones can help you optimize your financial security, protect your health, and make choices that support the lifestyle you desire in retirement. It might also be wise to consult with a knowledgeable financial advisor to tailor these general rules to your specific situation.