Retirement Planning Retirement PlanningRetirement Planning
Advice on how to prepare for life after government.

Best Dates to Retire: Tax Considerations

"You only retire once," the saying goes -- although I've met some people who are on their second or third retirement. Still, it makes sense to be careful about picking just when to leave.

As I expected, the Best Dates to Retire 2009 column I wrote last week generated some concern among readers about choosing the absolute best date. During the past week, I've consulted with Bob Leins, my colleague at the National Institute of Transition Planning, who is a tax specialist. He provided some tips on choosing the best time of the year to plan your retirement from a tax perspective.

Such considerations further clarify the dates I selected as best on the calendar published last week, so it's worth spending a little time thinking about how leaving during different seasons of the year might affect your retirement.

In the Spring If you are not trying to cash in 448 hours of unused annual leave before the end of the leave year, then you might consider March 31, 2009, if you're in the Federal Employees Retirement System, or April 3 if you're under the Civil Service Retirement System. Why?

  • All annual leave will be paid at the new year's salary rate regardless of which pay system you're covered under.
  • A few months at the new salary rate could help you get a bigger high-three average salary, which is the basis for the CSRS and FERS basic benefit computation.
  • Having some earned income in your year of retirement will allow full Individual Retirement Account eligibility for both you and your spouse.
  • Working a few months as a federal employee in your final year will allow for one last push of contributions into your Thrift Savings Plan account. It's possible that someone could retire at the end of March and still contribute the maximum amount ($15,500 in 2008, plus an additional $5,000 in catch-up contributions for those 50 or older) by dividing the amount of contributions by the number of pay periods remaining until retirement.
  • This extra tax deferral of final salary into the TSP may put you in a lower tax bracket. If you've been buying savings bonds during your career or making other taxable investments, this might be a good time to begin cashing them in. What else are you going to live on if you are putting most of your final paycheck in the TSP?

Late Spring/Early Summer

Retiring on June 30 (FERS) or July 3 (CSRS) provides many of the same benefits as an early spring retirement. There is an almost even split between half a year as an employee at full salary (allowing retirement contributions to continue and IRA participation) and half as a retiree (or someone who has begun a second career).

An added bonus next year for CSRS employees is that if they choose July 3 as their retirement date, their last day on the job actually would be July 2; July 3 is a federal holiday and it comes the end of a leave period. A day of pay for enjoying a holiday and a earning your final leave accrual isn't exactly a golden parachute, but it's still a nice way to go out.

Late Summer/Early Fall

Sept. 30 (FERS) or Oct. 2 (CSRS) provides the same benefits as a spring or summer retirement. In addition, you'll have only three months of retired pay in 2009, which is less devastating to your taxes if you are beginning a second career. Usually, new retirees are placed in an interim status while the Office of Personnel Management finalizes their claims. During this time, only a partial retirement payment is made. A retroactive payment to provide full retirement benefits might not be paid until the following year, and this might shift some taxable income to 2010.

Note that I'm deliberately using "might" instead of "will" in this situation, because it's possible you won't go into interim status. Some claims are finalized within days of receipt and the full annuity payment is reflected in the first retirement check.

If you are earning a high salary in your last year of employment, you may have maxed out on Social Security tax. (In 2008, the maximum taxable wage subject to 6.2 percent FICA withholding is $102,000). If a lump-sum annual leave payment or income from a second career received in 2009 pushes you over the maximum taxable limit, it won't be subject to FICA tax.

Here's another tip for high-income earners: If you are facing the alternative minimum tax, you may be able to reduce state tax withholding for your final salary payment and your lump-sum annual leave check to reduce the amount of state income tax that you have to pay.

End of the Year

If you're considering departing in the final days of a year, remember one thing: receiving a big lump-sum payout the following year for your unused annual leave along with 12 months of retirement income could push you into a higher tax bracket in your first year of retirement. This is especially true for those who are retiring from their federal career on a Friday and starting a new career on a Monday, adding additional earned income to retirement benefits.

But the impact of a change in tax brackets can be slight and if you're income is high enough that the alternative minimum tax is applicable without consideration of the lump-sum leave payout, then getting all of the money in one year actually could be a good thing. Also, the accumulated leave and the final salary qualifies for an IRA contribution.

Next week, I'll handle some individual questions from readers about the best dates to retire.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.


Tammy Flanagan has spent 30 years helping federal employees take charge of their retirement by understanding their benefits. She runs her own consulting business at and provides individual counseling as well as online training for the National Active and Retired Federal Employees Association, Plan Your Federal Retirement as well as the Federal Long Term Care insurance Program. She also serves as the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on

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