As you likely know, all of your federal retirement income — FERS/CSRS pension, Social Security (for FERS participants) and distributions from the Thrift Savings Plan (TSP) — are subject to federal income taxes. But you may be surprised to learn that this retirement income may also be subject to state income tax depending on where you live.
Your FERS/CSRS Pension
There are 14 states that do not tax your pension income at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire, Alabama, Illinois, Hawaii, Mississippi, and Pennsylvania. Meanwhile, some states, New York for example, exclude federal pensions from income tax but do tax some private pensions.
Your Thrift Savings Plan
Only 12 states exempt TSP distributions from income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming, Illinois, Mississippi and Pennsylvania. Other states may exempt TSP distributions if they fall below a certain taxation threshold and it varies from state to state.
Your Social Security
There are 13 states that tax your Social Security retirement income: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. If you live in one of these states, check the taxation laws because the criteria for taxing Social Security varies.
Are There Strategies To Lower Your Tax Burden In Retirement?
The short answer is: yes. However, it all depends on your personal financial situation and goals. That’s why it’s a good idea to work with a FRC℠ certified professional who fully understands your federal benefits. He or she can help you create a strategy designed to lower your tax burden in retirement.