What FDNY Firefighters Should Know About Taxes in Retirement

 If you are a FDNY firefighter and are planning for retirement, this article may provide some helpful tax information to be aware of. I will go through and list some of the differences in taxation you will see as an active-duty firefighter compared to a retiree. The topics mentioned include the change in FICA taxation, benefits for members who retire in NY state or in a state with no income taxes, some of the effects of moving to a different state, and a tax planning strategy that may be worth considering. 

 Starting off on a positive note, when it comes time to retire and you switch from earning a paycheck to collecting a pension, you will notice a significant change in tax withholdings. Social Security and Medicare taxes – known as FICA applies to earned income but does not to pension income. Therefore, you will not see FICA taxes being withheld from your pension check. To give context, for someone earning under the wage base limit, which was $142,800 in 2021, the FICA tax represents 7.65% of income (for those earning above the wage base the FICA tax progressively becomes a lower percentage of income). Additional good news is that FICA tax also does not apply to withdrawals from retirement accounts like the 457 or an IRA. It is important to note however that if you continue to work in another job once retired you will pay FICA taxes income earning from that job. 

 Another positive note is that unlike when you are actively working, pension income is not subject to state or city income taxation in New York State. For those residing in the five boroughs, state and city income taxes combined can often amount to 6-8%+ of income, and for those living outside NYC state taxes can still represent 4-5% or more. These state and local benefits can also apply to retirement accounts that are considered pension plans such as excess pension contributions and UFA and UFOA annuities. So, in addition to not owing FICA taxes on your pension, you will also not owe state or city income taxes on your pension if you stay in New York State in retirement or move to a state with no income tax or that does not assess taxes to New York public pensions. If you want to consider moving to a different state that charges income taxes, you will want to work with your accountant or tax advisor to determine the tax consequences to doing so. 

There are additional tax benefits that can make New York a friendly tax state for FDNY retirees. The first is that social security benefits are not subject to taxation in New York. The second is that those aged 59.5 and older are able to deduct $20,000 on their state tax return each year from retirement income. This can be an added tax benefit if you would like to take a withdrawal from a retirement account like the 457 or an IRA, or when it comes time to start taking required minimum distributions. You will also want to consider these tax benefits if you are considering moving to another state in retirement. One way for someone to save even further in state taxes upon retirement would be to move to a state that does not have an income tax like Florida. But for those who maintain their residence in New York there are many benefits the state offers, particularly to retirees with public pensions.

One tax planning strategy that may be worth considering for retired FDNY members is converting retirement funds into a Roth IRA. This can work particularly well for FDNY members who qualify for a disability pension in which most of their income is federally tax free and if they have accrued a significant balance in retirement accounts that will be subject to required minimum distributions (RMD’s) in the future. By converting some money each year in between the time of their retirement date and when they start collecting social security and RMD’s from retirement accounts, a retired FDNY member can pay taxes as they go and shift money from taxable accounts into a tax-free account. This strategy requires careful planning and should be discussed with a tax advisor before being executed.

 As listed in this article, there are many tax benefits in place for FDNY retirees including not owing FICA taxes on their pension, not owing state or local taxes on their pension or pension retirement accounts if they stay in New York or move to a state that does not charge income taxes on public pensions, and for those who stay in New York additional benefits include not paying state tax on social security and getting a tax break on the first $20,000 in withdrawals in retirement accounts for those 59.5 and older. These various benefits can help FDNY retirees keep more of their hard-earned retirement benefits. For those contemplating moving to another state, they should work with their tax advisor to determine the additional tax costs or benefits associated with changing their state of residence.

*Disclosure this article does not constitute tax advice and we would advise you to work with a tax professional to discuss any of these topics further