My husband was retired in May of 2020 at age 65 after 20 years of service with the FBI. We kept our health, vision and dental insurances, which are deducted from his annuity. Are these premiums deductible on our yearly taxes? I did read the deductions are made post-tax. – Pamela
If you have been successful saving for retirement, then congratulations. Unfortunately, because you have been successful you may have added an additional expense. When you retire, taxes can be one of your biggest expenses. Understanding how taxes work and what you can deduct is crucial for planning a successful retirement. This article explains how taxes affect your pension, health insurance and offers ways to plan for them.
Health Insurance and Taxes
As a Federal employee, when you work, your health insurance premiums are not taxed. The premiums are paid with pre-tax dollars. This is a great benefit and helps you to minimize what you are paying in taxes while working. However, this changes once you retire. If you keep your health insurance after retiring, here’s how it affects your taxes:
- The premiums are taken from your pension after taxes, so technically, you are paying more for the benefit than when you were working.
- You can’t deduct these premiums from your taxes unless you are self-employed.
This means your income must be higher to pay your health insurance premiums and in most cases, the higher income is taxable to you.
Now, let’s take a look at Income and the four ways income can be taxed.
Types of Income and How They’re Taxed
There are different types of income, and they’re taxed in various ways:
- Ordinary Income: This includes your pension, Social Security (up to 85%), and other regular income. It is taxed at the highest rate. Currently, in 2025, your tax rate can be from 0%-37% on Ordinary Income.
- Tax-Deferred Income: This is income from sources like a Traditional Thrift Savings Plan (TSP) that you don’t pay taxes on until you withdraw the money. So, simply, your money grows tax-deffered till you withdrawal it, then it is considered ordinary income and taxed at your ordinary income rate.
- Capital Gains: This is profit you make from selling investments. It is often taxed at a lower rate than ordinary income.This is a preferred type of income because of its current tax benefits. In 2025, Capital Gains rated start at 0% and go as high as 20%. So, depending on your Ordinary Income rate, this most of the time, will be the preferred way to receive income.
Tax-Free Income: This is the best type of income for retirement, better than Capital Gains and much better than Ordinary Income. Sources of Tax-Free Income include money from Roth TSP or Roth IRA accounts, which is not taxed when withdrawn.
Planning for Taxes in Retirement
Because health insurance is such a large expense for most in retirement, even though you can’t deduct health insurance premiums, it’s important to plan for them. They can push your taxable income higher than expected, so you’ll need to be prepared. Preparing for where your income is coming from, which of the four different categories, and developing the flexibility to decide which type of income you receive will benefit you greatly in the amount of taxes you pay in your retirement. Being proactive in your retirement savings and your tax planning will give you a great advantage.
While you can’t control whether your pension is taxed, you can control how you manage your TSP. For example, putting money into a Roth TSP can help you lower your taxes in retirement.
With a little planning, you can make a significate difference in your tax expense especially if tax brackets are higher in the future that what they are now.
Key Points to Remember:
- Health insurance premiums in retirement are not tax-deductible.
- Tax-free accounts like Roth TSP are best for minimizing taxes in retirement.
- Planning ahead can help reduce your taxes once you retire.