How Am I Taxed in Retirement?

Meet Sarah, a married Seattle firefighter with 28 years of service. At 53, she's planning to retire at 55 with a solid financial foundation: a LEOFF 2 pension, $650,000 in her 457(b) plan, and $180,000 in a Roth IRA. But Sarah's biggest concern isn't fighting fires anymore—it's figuring out how much Uncle Sam will take from her and her spouse's retirement income.
Understanding retirement taxation is crucial for Washington State employees like Sarah because your tax situation changes dramatically once you stop working. Unlike your working years where taxes were straightforward, retirement brings multiple income sources with different tax rules. Getting this right can save you thousands of dollars annually.
Core Tax Principles for Washington Retirees
Before diving into Sarah's strategy, here are the fundamental tax principles every Washington public employee should understand:
1. Washington Has No State Income Tax Your pension, Social Security, and retirement account withdrawals won't face state taxation—a significant advantage over retirees in other states.¹
2. Federal Taxes Still Apply While you'll avoid state taxes, federal income tax rules remain the same for most retirement income sources.²
3. Different Income Sources Have Different Tax Rules Your pension is fully taxable, Social Security may be partially taxable, Roth accounts are tax-free, and with taxable accounts the gains may be subject to favorable capital gains rates.³
4. Required Distributions Begin at Age 73 You must start taking money from traditional retirement accounts at age 73, whether you need it or not. This age will go up to 75 over time.⁴
5. Tax Planning Becomes More Important With multiple income sources and potential tax bracket changes, strategic planning can significantly impact your after-tax income.
Sarah's 5-Step Retirement Tax Strategy
Step 1: Understanding Pension Taxation
Sarah's LEOFF 2 pension will provide her with approximately $8,750 monthly ($105,000 annually) - 50% survivor option selected based on her 30 years of service at retirement and final average salary of $175,000. This entire amount is considered ordinary income and is fully taxable at the federal level.
Here's what this means for Sarah:

• Her $105,000 pension gets added directly to her taxable income
• Seattle FD firefighters don’t pay into Social Security (very common for WA Firefighters)

Sarah's pension tax impact: Filing jointly with her spouse, and assuming this pension income puts them in the 22% federal bracket ($145,000 in total income, standard deduction taken), they'd owe about $15,000 annually in federal taxes.
Step 2: Navigating Social Security Taxation
Unlike most retirees, Sarah won't receive Social Security benefits because firefighters in Washington typically don't pay into the Social Security system. This creates a unique situation where her family's retirement income will come primarily from her pension, retirement savings, and any income her spouse may have.
Sarah’s spouse may be eligible for Social Security benefits so Sarah may be eligible for spousal benefits. This component must be factored into their calculation.
Social Security will likely be taxable up to 85% for Sarah and her spouse, however depending on your situation, Social Security may be taxable at 0%, 50% or 85%.
Step 3: Managing Retirement Account Withdrawals
Sarah's $650,000 in her 457(b) plan represents her biggest tax planning opportunity. Every withdrawal will be taxed as ordinary income, but she has flexibility in timing and amounts.
Key advantages for Sarah and her spouse:

• No 10% early withdrawal penalty before 59.5 for 457(b) plans⁵
• Sarah can start withdrawals immediately at retirement without penalty
• Without Social Security to coordinate until later in retirement, they have more flexibility in managing tax brackets
• Strategic withdrawals can help optimize their lifetime tax situation

Sarah's withdrawal strategy: She plans to withdraw $40,000 annually from her 457(b) plan to supplement her other income, adding this amount to her taxable income each year.
Step 4: Planning for Required Minimum Distributions
At age 73, Sarah will be required to take minimum distributions from her 457(b) plan. Based on her current balance, her first RMD would be approximately $24,528 ($650,000 ÷ 26.5 life expectancy factor). However, that’s almost 20 years away. If she doesn’t do anything with her 457(b), it could double or more, significantly increasing her tax liability.
Sarah's RMD challenge: By age 73, they'll be receiving:

• LEOFF 2 pension: $105,000
• Required 457 withdrawal: $24,528
• Total: $129,528 (before considering growth and any spouse income)

This could push them into a higher tax bracket when Sarah is older and they have less flexibility.
For Sarah, RMD’s will likely not be a significant concern because she is already withdrawing from her 457(b). However, it is incredibly important to be aware of RMD’s and think about these not just for Sarah, but also for her spouse.
Step 5: Optimizing with Roth Accounts
Sarah's $180,000 Roth IRA is her secret weapon for tax planning. These funds grow tax-free and can be withdrawn without affecting her tax bracket or Social Security taxation.
Sarah's family Roth advantage:

• No required minimum distributions during her lifetime
• Withdrawals don't affect their tax bracket
• Perfect for large expenses without bracket jumping
• Can provide tax-free income to balance Sarah's taxable pension

Your Action Plan
Ready to optimize your retirement taxes like Sarah? Here's your next steps:

1. Calculate your estimated retirement income from all sources using DRS online calculators
2. Review your current retirement account allocation between traditional and Roth options
3. Consider increasing Roth contributions in your working years if you're in a lower bracket
4. Schedule a consultation with a tax professional familiar with Washington State employee benefits
5. Run tax projections for different retirement scenarios and withdrawal strategies

Remember, tax planning isn't a one-size-fits-all approach. Your optimal strategy depends on your specific income sources, family situation, and retirement goals.

​Sources and Resources

1. Washington State Department of Revenue - No State Income Tax
2. IRS Publication 590-B - Distributions from Individual Retirement Arrangements
3. Social Security Administration - Taxation of Benefits
4. IRS - Retirement Plan and IRA Required Minimum Distributions FAQs
5. Washington State Department of Retirement Systems - Deferred Compensation
6. IRS Publication 915 - Social Security and Equivalent Railroad Retirement Benefits

-Seth Deal