Real Question from a Federal Employee
Question 1705 from Sallie:
I have a question about the FERS Supplement. I am going to retire from the BOP in 2027 at age 58. In 2028, I plan to get another job until age 62. I understand there is a earnings test for additional income. I believe it is 23,400 as of right now. So here is the question. Let’s say I find a job for $40K per year, which is $16,600 over the limit. However the new place I work has a 401K that I can contribute to. If I would contribute $18000 to the 401K, that would bring my taxable income down to $22K. Would the 18K still count against me?
Can a 401(k) Contribution Save Your FERS Supplement?
If you want to retire before turning 62, the FERS Special Retirement Supplement (SRS) can help fill the gap between your federal retirement and when you qualify for Social Security.
But there’s a catch many federal employees don’t fully understand:
Your supplement can be reduced or even stopped if you earn too much after you retire.
Let’s break down how this works and where some common misunderstandings come in.
What Is the FERS Supplement?
The FERS Special Retirement Supplement is an extra payment for eligible federal employees who retire before age 62. It is meant to be similar to the Social Security benefit you earned while working for the government.
However, this benefit is temporary and comes with specific rules.
One of the key rules is the earnings test.
The Earnings Test: Why It Matters
After you retire and start getting the supplement, any money you earn from working can affect how much you receive.
There is an earnings limit each year, similar to Social Security rules. If your income goes over that limit:
- Your supplement is reduced by $1 for every $2 over the threshold
- If your income is high enough, your supplement could be fully reduced to $0
This applies to earned income, not passive income like investments.
The Common Misconception About 401(k) Contributions
Many federal employees believe:
“If I contribute to a 401(k), I can lower my income and avoid the supplement reduction.”
That idea makes sense, but it doesn’t actually work that way.
Here’s why:
- The earnings test is based on your Social Security wages (W-2 Box 3)
- Contributions to a 401(k) reduce your taxable income (Box 1)
- But they do NOT reduce your Social Security wages
What this means:
Even if you contribute a large portion of your paycheck to a 401(k), the government still counts your full earnings when applying the earnings test.
So, your supplement can still be reduced.
What Income Counts (and What Doesn’t)
Understanding what counts toward the earnings test can help you plan better.
Income that DOES count:
- W-2 wages from a job
- Net income from self-employment
Income that generally does NOT count:
- TSP withdrawals
- IRA distributions
- Pension income (including FERS annuity)
- Investment income (interest, dividends, capital gains)
Are There Any Planning Options?
While 401(k) contributions won’t help reduce the earnings test impact, there may be other strategies worth exploring depending on your situation.
Some examples to consider:
- Managing how much you earn during the supplement years
- Timing when you return to work after retirement
- Exploring self-employment structures, where income and expenses may be handled differently
These options can be more complicated and may involve tax or legal issues, so it’s important to review them carefully.
Why This Matters for Your Retirement Plan
The FERS supplement can be a meaningful income source for several years. But without proper planning, it can be reduced faster than expected.
Many federal employees are surprised to learn that:
- Working in retirement may reduce their supplement
- Traditional tax-saving strategies don’t always apply here
- The rules are tied to Social Security definitions, not just taxes
The FERS supplement is a valuable benefit, but it has rules that are easy to misunderstand.
Key takeaway:
Contributing to a 401(k) does not reduce the income used to calculate the supplement earnings test. If you plan to work in retirement, it’s important to understand how your income may affect this benefit.
Taking time to understand these rules can help support more informed retirement decisions and avoid unexpected reductions in income.
ABOUT THE AUTHOR
Micah Shilanski, CFP®, is a distinguished financial planner known for his deep commitment to providing exceptional advisory services to his clients. As the founder of Plan Your Federal Retirement, Micah has dedicated his career to helping federal employees understand and optimize their benefits to help ensure a secure and prosperous retirement. His experience is widely recognized in the industry, making him a sought-after speaker and educator on financial planning and retirement strategies.
Micah’s approach is client-centered, focusing on creating personalized strategies that address each individual’s unique needs. His work emphasizes the importance of comprehensive planning, incorporating aspects of tax strategy, investment management, and risk assessment to guide clients toward achieving their financial goals.Micah Shilanski (00:00.206)
So you’re gonna retire, get this amazing FERS supplement, but how do you make sure it doesn’t go back to OPM in retirement? If ever wondered the answer to that question, then stay tuned for this FERS Federal Fact Check. Hi, I’m Micah Shilanski and we have a really good question coming in from Sally. So Sally says, I have a question about the FERS supplement. I’m gonna retire from the BOP in 2027 at the age of 58 years young. In 2028, I plan to get another job until 62.
So roughly what four years of another job, right? I understand there’s an earnings test or limitation for additional income. I believe it’s 23,400 as of right now, that is correct. So here’s the question. Let’s say I find a job for $40,000 a year, which is 16,000, I’m gonna round in her. She has exact numbers, let’s just round. $16,000 over the limit. However, the new place I work for has a 401k that I can contribute to. If I would contribute 18,000 to 401k, would that bring my taxable income down to 22,000?
and the 18,000 would not be held against me. Sally, I love that question. I love that you’re thinking proactively in taxes and saying, hey, what are the rules, right? And hey, we all got to play by the rules legally, but how do we play by the rules to save money? So love the way you’re looking at it, answer? No, so sorry. They look at your social security earnings, right? So if you look at your W-2, that box one is gonna be your taxable earnings.
box two is going to be taxed with hell box three is social security earnings. Even if you make a 401k contribution, that is still not going down. It would still be $40,000 in your example. And that’s going to be the number they use to reduce that FERS supplement. So what options do you have? Well, another thing you could do is be self-employed under so the self-employed side of being where you want to work out, could you be a contractor, right? If you’re a contractor, we could play some games with an S corporation and how much you get paid as reasonable wages.
versus an owner’s distribution, we could then separate those things out and now that’s not tax-lesson. Maybe you’re self-employed, we can do some other creative deductions that you have to reduce that $40,000 to reduce that penalty. So you have a little bit more creativity under the self-employed hat than you do under the W-2, but the short answer to your question is no. Just because you’re putting money into an HSA or a 401k or anything like that nature at your new job, that does not reduce the potential penalty that’s gonna be there for that FERS supplement for making those excess earnings. Love the way you’re thinking about this. You know, this information is really important to get outside of federal employees to make sure you’re planning for your retirement. Our goals help another 1 million federal employees with a retirement and we cannot do that without your help. So next time, happy planning.
The content in Planner Federal Retirement is for general informational purposes only and should not be considered individualized advice. Investing involves risk, including possible loss of principle, and past performance does not guarantee future results. Guests are not affiliated with CWM LLC Investment Advisory Services offered through CWM LLC and SEC Registered Investment Advisor. Planner Federal Retirement is not affiliated with the federal government.