A married couple over 65 can have about $148,000 of income and still be in the 12% tax bracket. Yet most federal retirees pay far more tax on their TSP than they need to, because they take money out based on what they need instead of planning around their tax bracket.
Here’s how much income is tax-free now, the withdrawal rules that cost people money, and the traps to avoid. All figures are for tax year 2026.
How much income is tax-free now
For a married couple filing jointly, both 65 or older:
| Deduction | Amount |
|---|---|
| Standard deduction (MFJ) | $32,200 |
| Age-65 extra ($1,650 each) | $3,300 |
| New senior deduction ($6,000 each, 2025–2028) | $12,000 |
| Total before the first taxable dollar | $47,500 |
The 12% bracket tops out at $100,800 of taxable income. Add the $47,500 in deductions, and that’s roughly $148,300 of gross income still taxed at no more than 12%.
One catch: the new senior deduction starts phasing out above $150,000 of modified adjusted gross income (MAGI) for married couples, and pension and TSP withdrawals count toward it.
Withdrawal rules that cost people money
- You choose where the money comes from. You can withdraw from traditional only, Roth only, or pro rata from both. The common advice that everything has to come out pro rata is wrong.
- Withholding depends on how you withdraw. Lump-sum and partial withdrawals have 20% mandatory federal withholding. Installments of 10+ years or based on life expectancy can be set to 0% withholding.
- TSP withholds no state tax. If your state taxes retirement income, you’ll need to plan for that yourself, through estimated payments or withholding from another source.
Required minimum distributions (RMDs)
| Born | RMDs start at |
|---|---|
| Before 1960 | 73 |
| 1960 or later | 75 |
Roth TSP balances have no RMDs. And if you miss an RMD, the penalty is 25% of the amount you should have taken, or 10% if you fix it quickly. It’s no longer the old 50%.
In-plan Roth conversions
Since January 28, 2026, you can convert traditional TSP money to Roth right inside the TSP. No IRA needed.
- No withholding is allowed on conversions, so you’ll pay the tax from money outside the TSP.
- The best window is often between retirement and when RMDs or Social Security begin, while your taxable income is lower.
- The Roth TSP 5-year clock doesn’t carry over to a Roth IRA. If you later roll your Roth TSP to a Roth IRA, the IRA has its own clock.
Three tax traps to watch
- IRMAA. Your income from two years ago sets your Medicare premium. It works like a cliff, per person: going even $1 over a threshold can raise your premium for the whole year. A big TSP withdrawal or Roth conversion can trigger it.
- Social Security taxation. Large TSP withdrawals can make up to 85% of your Social Security benefits taxable.
- QCDs. Qualified charitable distributions can’t be made directly from the TSP. If you want to give to charity this way, you’d need to roll money to an IRA first.
The bottom line
Plan your TSP withdrawals by tax bracket, not just by what you need. Know how much income is tax-free, choose which balance you withdraw from, set your withholding on purpose, and watch for IRMAA and Social Security taxation before you take a big withdrawal or conversion.
Are you a federal employee within 12 months of retirement, or already retired, with $1 million+ invested? Book a free 15-minute Fit Call. For more on your TSP, get a free copy of Dallen’s book, Building Wealth in the TSP.
Educational only, not tax, investment, or legal advice. Please consult your own tax, legal and financial advisors for personalized advice. Haws Federal Advisors | HawsFederalAdvisors.com