Deductions in retirement
A common question DRS receives: “Is my pension benefit taxed?” The short answer is yes, you will owe federal income tax on your pension benefit. DRS has a tax calculator available within your online account to determine the amount that could be withheld.
However, what soon-to-be retirees are often trying to understand is how their “gross wages” will compare to their “net wages.” This can be a confusing subject when you are actively working as there are many different types of deductions that come out of each of your paychecks. While you are working, items like FICA, Medicare, union dues, retirement contributions, paid family medical leave and workers compensation insurance all deduct a percentage of your pay, reducing your gross wages to what you see deposited into your bank account. This reduction is usually somewhere between 25-30% but depends on your individual situation.
The good news is that in retirement, these required deductions will no longer be applied to your pension payments. You could still have federal income tax withheld, and depending on your circumstances, may choose to have medical premiums or charitable donations through the Washington State Combined Fund Drive taken out monthly from your pension payments. For a typical retiree, these deductions could reduce their pension payment by 10-15%, but once again circumstances vary for each individual.
The examples below compare an actively working employee and retiree who both have gross monthly wages of $6,000. Based on deductions though, the retiree would have about $800 more deposited into their bank account each month.
Deductions for medical insurance premiums can vary greatly by employer for active employees and by age for retirees who are eligible for the Public Employees Benefit Board (PEBB) so the scenarios below may differ from your own circumstances.
A retiree can always adjust their federal income tax withholding by completing the W-4P form. For more retirement planning tools you can check out the DRS planning checklist: https://www.drs.wa.gov/life/retire/check/
Active Employee
Gross Monthly Wages $6,000| Deduction Source | % Deducted | $ Deducted |
|---|---|---|
| Fed Inc Tax | 0.11 | $660 |
| FICA | 0.062 | $372 |
| Medicare | 0.0145 | $87 |
| Union Dues | 0.015 | $90 |
| Retirement Contributions | 0.05 | $300 |
| PFML | 0.0058 | $34.80 |
| Workers Comp | 0.0015 | $9 |
| Medical Premiums | $100 |
Net Monthly Pay $4,347.20
Retired Employee
Gross Monthly Wages $6,000| Deduction Source | % Deducted | $ Deducted |
|---|---|---|
| Fed Inc Tax | 0.11 | $660 |
| Medical Premiums | $175 |
Net Monthly Pay $5,165
