I’ve written extensively over the years about protecting what you’ve worked a lifetime to accumulate. Lately, I’ve been researching an important question: Is it really possible to exist in the 0% tax bracket in retirement?
With government liabilities rising each year, taxes are likely going up. The government faces massive obligations with Social Security, Medicare, and a national debt that now exceeds $110,000 per citizen. Without intervention, increasing taxes is one of the only ways to foot the bill. So, can you get to the 0% tax bracket?
The short answer for federal employees is: It’s difficult to pay zero taxes on everything, but you can absolutely achieve a 0% tax rate on your investment withdrawals.
In 2023, the standard deduction for a married couple filing jointly was $27,700. That means the first $27,700 of your income is taxed at 0%. However, as federal retirees, our CSRS or FERS annuities alone often push us well above that threshold. But don’t be disheartened! By strategically managing your assets, you can shield the rest of your retirement income from the IRS.
Here is a step-by-step guide to minimizing your taxes and pushing your investment withdrawals into that beautiful 0% tax-free zone.
Step 1: Understand the Three Tax Buckets To master your taxes, you must understand how your different income sources are treated by the IRS:
- The Taxable Bucket: This includes brokerage accounts, savings accounts, CDs, and mutual funds. This bucket is great for a 6-month liquid emergency fund, but you shouldn’t overfund it because you are taxed on the capital gains and interest every year.
- The Tax-Deferred Bucket: This is where most federal employees have the bulk of their wealth—Traditional TSP, Traditional IRAs, and 401(k)s. We’ve been told our whole lives to invest here, but this money is tax-deferred, not tax-free. Every dollar you pull out is taxed as ordinary income. Worse, when you reach your Required Minimum Distribution (RMD) age (currently 73 or 75), the IRS forces you to withdraw this money, which can create a “tax cliff” that pushes you into a much higher tax bracket and triggers Medicare IRMAA surcharges.
- The Tax-Free Bucket: This includes Roth IRAs, the Roth TSP, and Life Insurance Retirement Plans (LIRPs). This money is completely tax-free—no federal taxes, no state taxes, no capital gains taxes, and it doesn’t impact the taxation of your Social Security benefits. This is where you want your money.
Step 2: Utilize Roth Conversions During the “Gap Years” If you have a massive balance in your Traditional TSP, it is a ticking tax time bomb. To defuse it, you need to execute Roth conversions. A Roth conversion involves moving money from your pre-tax accounts into a Roth account. Yes, you have to pay taxes on the converted amount in the year you make the move, but you control the timing.
The best time to do this is during your “gap years”—the period after you retire but before you start taking Social Security and RMDs. During this window, your income is often at its lowest point. By converting funds up to the top of your current low tax bracket (like the 12% or 22% bracket), you lock in today’s historically low tax rates. Once that money is in the Roth, it grows completely tax-free for the rest of your life.
Note: Starting in January 2026, the TSP is officially launching a Roth in-plan conversion feature, allowing you to convert your Traditional TSP balance directly to your Roth TSP balance without having to roll it out to an IRA first. Personally, I converted half of my business IRA to a Roth back in 2011, and that account has grown completely tax-free ever since, dramatically reducing my RMDs.
Step 3: Master “Asset Location” Most investors use the exact same investment mix (like 60% stocks and 40% bonds) across all their accounts. This is a missed opportunity. You want your most aggressive, highest-growing investments (like the C and S Funds) housed in your tax-free Roth bucket so all that massive growth is never taxed. Conversely, your safe, income-producing assets (like the G Fund or F Fund) should be kept in your Traditional TSP or taxable accounts.
Because the TSP currently forces your investment allocation to apply uniformly across both your Traditional and Roth balances, many retirees choose to move their funds to outside IRAs so they gain the autonomy to invest their Roth dollars aggressively while keeping their pre-tax dollars conservative.
Step 4: Take Advantage of the 0% Capital Gains Bracket If you have investments in your taxable bucket (brokerage accounts), you can strategically sell assets to pay 0% in taxes. For the 2025 tax year, if you are a single filer with a taxable income up to $48,350, your long-term capital gains rate is exactly 0%. By carefully managing your withdrawals from your tax-deferred accounts, you can keep your total income below this threshold and pull from your taxable brokerage accounts completely tax-free.
The Bottom Line Moving from a state of “default” saving to a state of “control” takes planning. Don’t wait until the IRS forces you to take RMDs. Start evaluating your tax brackets today, consider Roth conversions while tax rates are low, and build up that tax-free bucket. It will save you—and your heirs—a fortune in the long run.
Last 5 posts by Dennis Damp
- How to Choose the Best Retirement Age for Your Future - August 8th, 2026
- TSP to Roth Changes: What Federal Employees Need to Know - August 1st, 2026
- Survivor Benefit: How to Protect Your Spouse’s Income - July 25th, 2026
- Long-Term Care Planning for Federal Employees - July 18th, 2026
- Federal Retirement 5-Year Rule: What Employees Need to Know - July 4th, 2026
Dennis V. Damp is an author, retired federal manager, business owner, career counselor and veteran. Damp is the author of 28 books, a recognized benefits expert, and a retired federal manager with 35 years’ service. Dennis has been a guest on hundreds of radio talk shows, CNN’s YOUR MONEY and the Lou Dobbs Cable TV shows, lectured at universities and colleges, produced Internet web sites and training videos, and has written hundreds of articles for national magazines and newspapers. His books have been featured in the Wall Street Journal, Washington Post, New York Times and U.S. News & World Report.
Dennis joined the Air Force in 1968 and spent over three years on active duty and an additional seven years with the Air National Guard. He was hired by the Department of Defense (DOD) after leaving active duty and transferred to the Federal Aviation Administration (FAA) in 1975. He spent the remainder of his career in various positions with the FAA. His last position was technical operations manager at the Pittsburgh International Airport’s air traffic control tower.
