Age gap retirement planning for federal employees: Avoiding the 'Widow’s Penalty,' Medicare planning and more

You’ve dedicated decades to serving as a federal employee, and now it’s time to enjoy your well-earned retirement. If you and your spouse have a significant age gap, there are special challenges and opportunities that must be considered. 

For federal employees with younger or older spouses, there are three main points to understand:

• How your FEHB benefits coordinate with Medicare
• How the 10-year age gap rule can substantially reduce your TSP withdrawal requirements 
• How to protect your surviving spouse from unexpected tax burdens 

These considerations aren’t merely technical details; they represent thousands of dollars in potential savings and crucial protection for your spouse’s financial security after your passing.

Medicare enrollment timing: when your spouse isn’t 65, yet

Federal employees and their spouses generally transition to Medicare upon reaching the age of 65. Unlike health insurance where both spouses take advantage of the plan at the same time, Medicare is accessible only at the age of 65, regardless of age gap, unless the younger spouse has a disabling medical condition. 

Federal Employee Health Benefits (FEHB) and Medicare coordination

As a federal employee, you have the valuable option to maintain your FEHB coverage into retirement, which creates important strategic opportunities when there’s an age difference between spouses:

• While covered under an active employer health plan (from you or your spouse’s job), you have the ability to postpone the Medicare Part B decision past age 65. However, even though you can stay on the same FEHB plan as a retiree, it is categorized as a “retiree” plan once you separate from service and no longer gives you the ability to delay the Medicare Part B decision. 
• You can enroll in Medicare Part A (hospital insurance) at 65 without taking Medicare Part B.
• If the older spouse chooses to sign up for Medicare Part B at age 65, Medicare becomes their primary insurer, while FEHB serves as a “backup” plan. For the younger spouse, FEHB will remain their primary insurance.
• Some FEHB plans offer a reimbursement program that helps pay for Medicare Part B premiums, but this is typically only offered on the “basic” level of the plan. If you’re on a family or self+1 plan, and the younger spouse needs the higher level of care, you may not be able to drop to the “basic” plan and get the reimbursement until the younger spouse is also eligible for Medicare Part B.

Healthcare planning considerations:

• Evaluate whether to enroll in Medicare Part B when eligible or rely solely on FEHB.
• Understand how your FEHB plan integrates with Medicare Part B and make sure your plan is still suitable for both spouses, while offering the lowest cost.

Required Minimum Distributions (RMDs): the 10-year age gap rule

One of the most significant retirement planning considerations for couples with substantial age differences involves Required Minimum Distributions from retirement accounts, including your Thrift Savings Plan.

The 10-year age gap advantage – and TSP shortcomings

When there’s more than a 10-year age difference between spouses, IRS regulations offer a valuable exception to standard RMD calculations that can significantly reduce your required withdrawals:

• Standard RMD rules require withdrawals from Traditional (tax-deferred) retirement accounts beginning at age 73 (rising to 75 in 2033) based on life expectancy tables.
• The 10-year age gap exception allows you to use the Joint and Last Survivor Table with you and your spouse’s ages, rather than the calculation based on the older spouse alone.
• This results in a smaller required distribution percentage, allowing more of your money to remain invested and grow tax-deferred.

TSP limitations for age-gap couples

Unfortunately, the TSP does NOT offer the Joint and Last Survivor method listed above, and only calculates RMDs based on the account-holders age. This means federal employees with younger spouses would be required to distribute much higher amounts annually.

Because of this, you may consider whether to keep funds in the Traditional TSP or roll them to an IRA before RMDs begin. Rolling funds to an IRA would allow you to use the Joint and Last Survivor method to lower your RMDs.

The “widow’s tax penalty”: protecting your surviving spouse

A key issue in retirement planning for couples with age gaps is the “widow’s tax penalty”.

When one spouse dies, the survivor’s tax filing status changes from “married filing jointly” to “single” or “qualifying widow(er)” (which is only available for two years following the death). This change typically results in:

• Higher tax rates beginning at lower income thresholds
• Loss of the additional standard deduction
• Potential reduction in Social Security benefits (continue receiving the higher-earning spouses benefit only)

For federal employees, this can be particularly impactful because your survivor’s FERS/CSRS annuity, continued TSP distributions and Social Security may push them into higher tax brackets despite having less total income.

Strategic planning for federal employees

As a federal employee with a younger spouse, consider these strategies to mitigate the widow’s tax penalty:

• Maximize Roth TSP contributions during your working years to create tax-free income sources for your surviving spouse. Roth accounts also have no Required Distributions. 
• Consider Roth conversions of traditional TSP funds during lower income years, potentially between retirement and when RMDs begin
• Evaluate life insurance options, including FEGLI and private policies, to provide tax-free death benefits
• Carefully plan pension survivor benefit elections, weighing the cost reduction during your lifetime against the survivor’s projected tax situation

Integrated planning for federal couples with age differences

Age-gap couples can benefit from considering Medicare timing, RMD strategies and tax planning as part of a comprehensive retirement plan.

For example, if you’re the older spouse with a substantial TSP balance, you might:

1. Maintain adequate liquidity to cover healthcare costs during any period when one spouse has Medicare Part B while the other doesn’t
2. Roll your TSP into an IRA to give you flexibility to do Roth conversions and use the Joint Life table when calculating Required Distributions.
3. Systematically convert portions of traditional retirement accounts to Roth while in lower tax brackets
4. Calculate the optimal survivor benefit election based on your spouse’s projected longevity and other income sources

Leveraging your federal benefits

Federal employees have excellent retirement benefits, offering unique planning opportunities for age-gap couples. By understanding Medicare enrollment, RMD rules and tax changes, you can maximize income and minimize taxes. Consulting a financial advisor specializing in federal benefits can help create a customized plan that ensures financial security for you and your spouse despite age differences.

Neil Cain and Austin Costello are certified financial planners with Capital Financial Planners. If you have questions about how retirement impacts your Medicare payments, register for a complimentary checkup. For topics covered in even greater depth, see our YouTube page.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Investing involves risk including loss of principal. No strategy assures success or protects against loss. 

This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.

 A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for five years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. 

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.