FERS Supplement and Investment Income: What's Exempt from the Earnings Test

The Earnings Test Only Cares About Earned Income

The FERS supplement earnings test follows the same rules as the Social Security retirement earnings test — and the distinction it draws is between earned income and everything else. Only earned income counts toward the annual threshold ($24,480 in 2026). Investment income, retirement distributions, and passive income are completely invisible to the test.

This distinction matters enormously for retirement planning because it means you can structure your income sources to preserve the full supplement while still maintaining the cash flow you need.

What Counts: Earned Income

Earned income is money you receive for active work. Specifically, the following types of income count toward the $24,480 threshold and can trigger a supplement reduction:

W-2 wages and salary from any post-retirement employer. This includes federal reemployment, private sector jobs, and state or local government work. Gross wages count — not take-home pay after deductions.

Net self-employment earnings. If you run a consulting practice, freelance, or operate a business, your Schedule SE net earnings count. This is gross business income minus allowable business expenses — not gross revenue.

Overtime and bonuses. These are wages and count in full.

Severance pay. If you receive severance from a post-retirement employer, it's countable earned income.

Deferred compensation. Income earned through active work but paid on a deferred schedule can count as deferred income under the earnings test.

For every $2 of earned income above $24,480, OPM reduces your supplement by $1. The reduction is capped at the total annual value of the supplement — it can zero out but can't go negative.

What Doesn't Count: Investment and Passive Income

Everything in this category is fully exempt from the earnings test. You can receive unlimited amounts of any of these without any impact on your supplement:

TSP withdrawals and Roth TSP distributions. Whether you take monthly TSP payments, a partial withdrawal, or a full lump sum, none of it counts. This includes Required Minimum Distributions when you reach RMD age (73 for those born 1951-1958, 75 for those born 1960 or later).

IRA withdrawals. Traditional IRA, Roth IRA, SEP IRA — all exempt from the earnings test. You'll owe income tax on traditional IRA distributions, but OPM doesn't count them toward the supplement threshold.

Capital gains. Profits from selling stocks, bonds, mutual funds, ETFs, or other investments. Short-term or long-term — both exempt.

Dividends. Qualified dividends, ordinary dividends, interest from bonds or savings accounts — all exempt.

Rental income. Net rental income from investment properties doesn't count, even though it appears on your tax return as income. OPM treats it as passive income outside the scope of the earnings test.

FERS pension payments. Your own annuity payments don't count against the supplement threshold.

Social Security benefits. If you're receiving spousal or survivor Social Security benefits before the supplement terminates at 62, those are exempt.

Military retired pay. Exempt regardless of amount.

Lump-sum annual leave payout. The payment you receive for accumulated annual leave at retirement is exempt, even though it appears on your final W-2.

Unemployment and workers' compensation. Both are exempt.

How Self-Employment Gets Measured

Self-employment income is the area that creates the most confusion and the most accidental overpayments. The earnings test uses your net self-employment earnings — the number on Schedule SE of your tax return — not your gross business revenue.

If you do consulting work that brings in $60,000 but you have $40,000 in legitimate business expenses, your net self-employment income is $20,000 — below the $24,480 threshold. No supplement reduction.

But the expenses must be genuine. OPM relies on a computer-matching process with SSA earnings records to verify reported earnings. If deductions are later disallowed, the recalculated net earnings could push you above the threshold and trigger a retroactive overpayment.

For retirees with both W-2 employment and self-employment, the earnings are combined. If you earn $15,000 in part-time W-2 wages and $12,000 in net self-employment income, your total earned income is $27,000 — $2,520 above the threshold, triggering a $1,260 annual supplement reduction.

Structuring Income for Supplement Preservation

The math here isn't complicated: keep earned income below $24,480 and take the rest from exempt sources. For most federal retirees, the exempt sources are more than sufficient to maintain their lifestyle.

Consider a retiree with these income sources:

• FERS pension: $3,200/month
• Supplement: $1,400/month
• TSP withdrawal: $1,500/month
• Part-time consulting: $20,000/year

Total annual income: $93,200. Earned income subject to the test: $20,000. Supplement impact: zero.

Now consider the same retiree earning $36,000 in consulting:

• Excess earned income: $36,000 − $24,480 = $11,520
• Annual reduction: $11,520 ÷ 2 = $5,760
• Monthly reduction: $480
• Effective supplement: $1,400 − $480 = $920/month

The question becomes whether the additional $16,000 in consulting income (above the $20,000 example) is worth the $5,760 supplement reduction. Net gain: $10,240. For most people, yes — but the calculation is worth running before committing to the work.

The breakeven point where earned income completely eliminates the supplement depends on your supplement amount. For a $1,400/month supplement ($16,800/year), the earned income level that zeroes it out is $24,480 + ($16,800 × 2) = $58,080.

The FERS Special Retirement Supplement Guide includes an earnings test reference card that lists every countable and exempt income type, plus a worksheet for calculating the supplement reduction at different earned income levels.

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