Taxes don’t disappear when you retire. Having a plan for dealing with taxes during retirement can help you maintain your financial well-being.
Your Deposits Were Not Taxed …
The money you deposited into your TCDRS account while you were working came out of your paycheck before taxes. In other words, that money was tax-deferred. You did not have to pay federal income taxes on it as long as it stayed in your TCDRS account.
… But Your Payments Are
Now that you’re retired and have started receiving a monthly benefit payment from TCDRS, you will owe taxes on the money you receive. How much you owe depends on your total income, not just how much you get from TCDRS.
You don’t have to have money withheld from your benefit payments to pay taxes. However, if you choose not to withhold, or if you don’t withhold enough, you may have to make tax payments. You might also have to pay a penalty if your withholding and payments are not sufficient for the tax year.
You can change your withholding anytime by signing in to your TCDRS account at www.TCDRS.org or by submitting the Income Tax Withholding (TCDRS-73) form.
Partial Lump-Sum Payments at Retirement Are Taxed, Too
Some TCDRS employers allow retirees to take a portion of their deposits and interest out of their account as a lump-sum at retirement. If you chose to take some of your retirement money out of your TCDRS account as a lump sum, please be aware that the IRS considers that payment taxable income.
TCDRS is required by the IRS to automatically withhold 20% of any lump-sum payment you received for taxes. You may also be subject to additional tax penalties.
What’s the Right Amount to Withhold?
To determine the right amount to withhold, it’s a good idea to talk to a financial professional about your personal tax situation.
To get an idea of how different withholding options can affect your benefit payment, sign in to your TCDRS account and check out our withholding calculator.
Inflation and COLAs
Your TCDRS retirement benefit is a fixed benefit payment. That means the benefit amount will be the same every month for the rest of your life once you start receiving it. However, your expenses can change even if your lifestyle doesn’t. The cost of goods and services, such as groceries, gasoline and health care, goes up a little bit each year. Over time, your benefit purchases less and less due to inflation. A cost-of-living adjustment restores some of the purchasing power your benefit loses during your retirement years.
Your TCDRS benefit doesn’t automatically increase to keep up with inflation. Each employer has to consider the cost of their total benefits package when deciding whether to adopt one. COLAs don’t automatically renew each year, so even if you receive one, you should still take inflation into consideration when figuring out your budget in the future.
Strategies to Soften the Impact of Inflation
Save your Social Security for later: By waiting to apply for Social Security benefits, you increase the amount of your monthly payment.
Work in retirement: Working while receiving a retirement benefit payment is something many retirees do by choice because they enjoy working. It has the added benefit of increasing your income with wages that likely keep pace with inflation.
Talk to a financial planner or accountant: A financial professional may be able to help you look at your total retirement income and determine how best to use your resources. He or she could suggest an appropriate rate to draw down the savings in your other financial accounts to best deal with the effects of inflation.
Getting Divorced After Retirement
You have many financial issues to consider during a divorce, including how it affects your TCDRS benefit. Your benefit is considered community property, which means your former spouse has a joint interest in it. Every case is different, however, and you have a variety of options in a divorce settlement.
If you are going through a divorce, please call TCDRS Member Services at 800-823-7782 so we can provide you with information about how a divorce may affect your TCDRS benefits.
Please note: There is a different process for getting divorced before you retire.
WATCH: Getting Divorced After Retirement
You May Not Have to Split Your Benefit
The law does not require you to split your benefit. Your former spouse may waive claim to your benefit in the division of your shared assets and property.
If You Decide to Split Your Benefit
TCDRS cannot give you legal advice, but there are specific legal requirements you must follow:
TCDRS can provide your benefit amount and estimates of your benefit value, which may be useful in dividing your assets.
Keep Your Information Up-to-Date
Please contact TCDRS Member Services at 800-823-7782 for help updating any of the following if they apply to you:
- Your beneficiaries
- Your address
- Your legal name
- Your banking information