Federal pensions are taxable income: your FERS or CSRS annuity is taxed by the IRS except for a small tax-free portion that returns the contributions you already paid tax on, traditional TSP withdrawals are fully taxable, and state treatment ranges from no tax at all to full taxation depending on where you live.
Nobody looks forward to taxes, and in retirement they feel especially personal. You worked for that pension. You saved that TSP. It is fair to want to know how much of it you actually keep.
Here is the good news: federal retirement income is taxed in predictable ways. Your annuity, your supplement, your TSP and your Social Security each follow a clear rule. The confusion comes from having four or five income sources at once, each with its own treatment, and from the fact that your state may add its own layer, or none at all.
Think of your retirement taxes as a stack of transparent sheets. Each income source is one sheet with its own rule printed on it. Laid on top of each other, they produce your tax bill. Change one sheet, such as a big TSP withdrawal, and the whole picture shifts.
This guide explains how each piece of federal retirement income is taxed at the federal level, how states treat federal pensions, and where withholding fits in. It is education only, not tax advice. FFEBA is an education organization and is not a tax preparer; tax rules change and your situation is your own, so confirm decisions with the IRS, your state or a qualified tax professional.
01Are federal pensions taxed?
Yes. A FERS or CSRS annuity is taxable federal income, except for a tax-free portion of each payment that gives back the retirement contributions you made from pay that was already taxed (IRS Publication 721, retrieved 2026-10-11). OPM calculates the split and reports it on Form 1099-R each January.
- Cost (your investment)The total of the retirement contributions you made from your pay over your career. You already paid tax on this money, so you get it back tax free.
- Simplified MethodThe IRS method for spreading that cost over your payments: your cost divided by a number of expected monthly payments based on your age when the annuity starts.
- Taxable portionEverything in each payment above the tax-free portion. For most FERS retirees this is the large majority of the annuity.
- Form 1099-RThe annual statement from OPM showing your gross annuity, the taxable amount and any tax withheld.
Because FERS employee contributions are relatively small compared with the lifetime value of the annuity, the tax-free portion is usually modest. CSRS employees contributed a larger share of pay, so their tax-free portion tends to be larger, but it still runs out once the full cost has been recovered.
02How is the tax-free part of my annuity figured?
For a single-life annuity starting after November 18, 1996, the IRS divides your cost by a fixed number of monthly payments based on your age at the annuity starting date (IRS Publication 721, retrieved 2026-10-11). The resulting dollar amount is tax free in every monthly payment until your full cost has been recovered.
| Age at annuity starting date | Number of payments used |
|---|---|
| 55 or under | 360 |
| 56 to 60 | 310 |
| 61 to 65 | 260 |
| 66 to 70 | 210 |
| 71 or over | 160 |
Source: IRS Publication 721, Simplified Method Table 1, single-life annuities starting after November 18, 1996 (retrieved 2026-10-11). Annuities with a survivor benefit use the IRS's Table 2, which is based on the combined ages of you and your beneficiary.
Worked example (educational estimate on the assumptions shown). You retire at 60 with a $30,000 a year single-life FERS annuity ($2,500 a month) and $24,000 of career retirement contributions. Your cost of $24,000 divided by 310 payments is about $77 a month, or about $929 a year, tax free. The remaining $29,071 or so is taxable that year. The numbers are hypothetical; OPM calculates your actual figures from your records.
Your record, not our example
Want this run on your own numbers?
A Federal Retirement Consultant (FRC) works through your own records with you 1:1. The review is free and nothing is booked until you choose a time.
03How are TSP withdrawals taxed?
Traditional TSP withdrawals, including all agency contributions and their earnings, are taxed as ordinary income in the year you receive them; qualified Roth TSP withdrawals are federal-tax free (IRS Publication 721, retrieved 2026-10-11).
- 20 percent withholding on most lump sums. The TSP must withhold 20 percent of the taxable part of an eligible rollover distribution paid to you, and you cannot opt out unless you roll it over (IRS Publication 721, retrieved 2026-10-11).
- 10 percent penalty before 59 and a half. It applies to the taxable part unless an exception applies, such as separating in or after the year you turn 55, or 50 for special provision employees (IRS Publication 721, retrieved 2026-10-11).
- Roth must be qualified. Roth withdrawals are fully tax free after five tax years since your first Roth contribution and age 59 and a half, disability or death (IRS Publication 721, retrieved 2026-10-11).
- Required minimum distributions are taxable. Traditional balances must start paying out at 73, or 75 if you were born in 1960 or later.
- Rollovers defer the tax. A direct rollover to a traditional IRA or eligible plan is not taxed until you withdraw from the new account.
The details, including the age 55 rule and withdrawal options, are in our TSP withdrawal guide. If you are deciding between Roth and traditional contributions or a conversion, see the Roth TSP guide.
04Is the FERS supplement taxable?
Yes. The FERS supplement is paid by OPM along with your annuity and is taxed as ordinary income. Even though it is designed to approximate Social Security, it is not a Social Security benefit, so the special rules that can exempt part of Social Security do not apply to it.
That matters in the years between retirement and 62. A retiree at 57 with an annuity, a supplement and perhaps TSP withdrawals can have taxable income close to their working years, with no part of it sheltered by the Social Security rules.
05How is Social Security taxed for federal retirees?
Up to 85 percent of your Social Security benefit can be included in federal taxable income, depending on your combined income: half of your Social Security plus your other income, including your annuity and traditional TSP withdrawals. Below certain income levels none of it is taxed; above them, 50 percent and then up to 85 percent becomes taxable.
Because a federal pension is already taxable income, many federal retirees reach the higher inclusion levels. That is one reason the timing of TSP withdrawals and Roth conversions matters: each dollar of extra traditional income can also make more of your Social Security taxable. Our Social Security guide for federal employees covers claiming and the 2025 repeal of WEP and GPO.
06Which states tax federal pensions?
States fall into three groups: those with no broad income tax, those that exempt federal civil service annuities, and those that tax them in whole or in part, often with an age-based exclusion. The table below lists the states we verified against state sources on 2026-10-11; it is not a full 50-state ruling, and state law changes often.
| State | Treatment of a federal civil service annuity | Source (retrieved 2026-10-11) |
|---|---|---|
| Alaska | No broad individual income tax | Kiplinger, states without income tax |
| Florida | No broad individual income tax | Kiplinger, states without income tax |
| Nevada | No broad individual income tax | Kiplinger, states without income tax |
| New Hampshire | No broad individual income tax (interest and dividends tax repealed for tax years from 2025) | Kiplinger, states without income tax |
| South Dakota | No broad individual income tax | Kiplinger, states without income tax |
| Tennessee | No broad individual income tax | Kiplinger, states without income tax |
| Texas | No broad individual income tax | Kiplinger, states without income tax |
| Washington | No broad individual income tax (a capital gains tax applies to some investment sales, not pensions) | Kiplinger, states without income tax |
| Wyoming | No broad individual income tax | Kiplinger, states without income tax |
| Alabama | Exempt: U.S. Civil Service Retirement benefits and defined benefit plan payments are excluded | Alabama Department of Revenue |
| Illinois | Exempt: the federally taxed portion of government retirement plan income is subtracted | Illinois Department of Revenue |
| Mississippi | Exempt: retirement income from federal retirement systems is exempt once plan requirements are met; early distributions can be taxed | Mississippi Department of Revenue |
| New York | Exempt: pensions from federal retirement systems are subtracted from New York income | New York State Department of Taxation and Finance |
| Pennsylvania | Generally exempt after retirement age: payments from an eligible employer retirement plan received after retirement are not taxed as compensation; confirm FERS treatment with the Pennsylvania Department of Revenue | Pennsylvania Department of Revenue |
| Michigan | Partly exempt: for tax year 2026, combined public and private retirement income can be deducted up to $67,610 single or $135,220 joint | Michigan Department of Treasury and Office of Retirement Services |
| Iowa | Partly or fully excluded for eligible residents: a retirement income exclusion applies from 2023 to residents 55 or older, disabled residents and certain survivors; check current Iowa guidance for limits | Iowa Department of Revenue |
| All other states with an income tax | Taxed in whole or in part, often with an age-based or dollar-capped exclusion | Check your state's department of revenue |
Three cautions apply to every row:
- Rules differ for TSP withdrawals. A state that exempts your annuity may still tax TSP withdrawals, or treat them differently by age.
- Moving changes the answer. Your state of residence when you receive the payment generally decides, not the state where you worked. Federal law bars your former state from taxing a pension paid to a nonresident (4 U.S.C. 114).
- Local taxes can add a layer. Some cities and counties levy their own income taxes.
Where you live in retirement is part of your tax picture, not just your mailing address.
07How do I set up tax withholding in retirement?
You choose federal withholding from your annuity through OPM's online retirement services or by form, and you can change it any time. Nothing is automatically right, so check it in your first year.
- 01
Estimate your total income
Add your annuity, any supplement, planned TSP withdrawals, Social Security and other income.
- 02
Set annuity withholding with OPM
Use OPM's online services or a withholding certificate to choose an amount.
- 03
Set TSP withholding separately
Installments of 10 years or more and annuity payments use your election; other payments have mandatory withholding.
- 04
Decide on Social Security withholding
You can ask SSA to withhold a set percentage.
- 05
Check state withholding
OPM can withhold state tax for many states; confirm yours.
- 06
Review after the first year
If you owed a lot or got a large refund, adjust. Estimated quarterly payments are another option.
08What other federal retirement items have tax effects?
Several smaller items catch new retirees off guard. None is complicated, but each is worth knowing before your first tax season in retirement.
- Lump-sum annual leave payment. Paid at separation and taxed as wages, which can push your final working year into a higher bracket.
- FEHB premiums. Employees pay FEHB premiums with pre-tax dollars through premium conversion, but annuitants pay them from after-tax annuity payments.
- Survivor annuities. A survivor annuity is taxable to the survivor, who also recovers any remaining tax-free cost.
- The senior deduction. For 2025 through 2028, people 65 and older can claim up to $6,000 each in addition to the standard deduction, subject to an income phase-out (IRS, retrieved 2026-10-11).
- Roth conversions. Converting traditional TSP to Roth adds the converted amount to that year's income.
09Moving forward with your retirement tax picture
Taxes are where all your federal retirement decisions meet: your retirement date, your survivor election, your TSP withdrawal pace, Roth versus traditional, your Social Security claiming age and where you live. Understanding each layer is the first step; seeing them together is the second. The FERS annuity guide and the FERS pension estimator, which gives an educational estimate on assumptions you enter, are good places to start with the largest income source.
For tax preparation, use the IRS, your state or a qualified tax professional.
FFEBA is an education organization. If you want someone to look at your own numbers, we can match you with a Federal Retirement Consultant (FRC), a professional trained on federal benefits. The FRC designation is listed with FINRA. The first review is free, nothing is booked until you choose a time, and you are never obligated to work with anyone we introduce. Get matched with an FRC.
10Questions federal employees ask
Is my FERS pension taxable?
Yes. Your FERS annuity is subject to federal income tax, except for a small tax-free portion of each payment that returns the retirement contributions you made from already-taxed pay. OPM figures the split and reports it on your Form 1099-R (IRS Publication 721, retrieved 2026-10-11).
Which states do not tax federal pensions?
Nine states have no broad individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Among states with an income tax, Alabama, Illinois, Mississippi, New York and Pennsylvania exempt federal civil service annuities under their own rules (state revenue departments, retrieved 2026-10-11).
How much tax do I pay on a TSP withdrawal?
Traditional TSP withdrawals are taxed as ordinary income at your federal rate, and the TSP withholds 20 percent of eligible rollover distributions paid to you. Qualified Roth TSP withdrawals are federal-tax free. Withdrawals before 59 and a half may add a 10 percent penalty unless an exception applies (IRS Publication 721, retrieved 2026-10-11).
Is the FERS supplement taxable?
Yes. The FERS supplement is paid by OPM with your annuity and is taxed as ordinary income. It is not a Social Security benefit, so the Social Security tax rules do not apply to it.
Is Social Security taxable for federal retirees?
It can be. Up to 85 percent of Social Security benefits can be subject to federal income tax depending on your combined income, and because federal retirees usually have a pension, many find that a large share of their benefit is taxable.
Is there a new tax deduction for retirees over 65?
Yes. For tax years 2025 through 2028, people 65 and older can claim an additional deduction of up to $6,000 each ($12,000 for a married couple who both qualify), phasing out above $75,000 of modified adjusted gross income ($150,000 joint) (IRS, retrieved 2026-10-11).
Reviewed by the FFEBA education team. Last reviewed October 2026.
Sources
- Internal Revenue Service, Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits (for 2025 returns), retrieved 2026-10-11
- Internal Revenue Service, check your eligibility for the new enhanced deduction for seniors, retrieved 2026-10-11
- Alabama Department of Revenue, income exempt from Alabama income taxation, retrieved 2026-10-11
- Alabama Department of Revenue, regulation 810-3-19-.04, defined benefit plans, retrieved 2026-10-11
- Illinois Department of Revenue, does Illinois tax my pension, Social Security, or retirement income, retrieved 2026-10-11
- Mississippi Department of Revenue, individual income tax frequently asked questions, retrieved 2026-10-11
- New York State Department of Taxation and Finance, information for retired persons, retrieved 2026-10-11
- Pennsylvania Department of Revenue, personal income tax guide: gross compensation (retirement payments), retrieved 2026-10-11
- Michigan Department of Treasury, Revenue Administrative Bulletin 2026-1 (retirement and pension benefits), retrieved 2026-10-11
- Michigan Office of Retirement Services, Public Act 4 of 2023 FAQ (2026 deduction limits), retrieved 2026-10-11
- Iowa Department of Revenue, retirement income tax guidance, retrieved 2026-10-11
- Kiplinger, states without income tax in 2026, retrieved 2026-10-11
Every government figure on this page carries its source and retrieval date. Worked examples are educational estimates on the assumptions shown, not a projection of any person's benefit. FFEBA is an education organization, not a financial advisor.
