Federal Retirement Tax Guide: How FERS, TSP & Social Security Are Taxed in 2026

Many federal employees assume a large portion of their retirement income is tax-free. The reality is that most of it isn't — but knowing the rules lets you plan around them.

Part 1: Your FERS Annuity — Mostly Taxable, But Not Entirely

Why part of it is tax-free

During your federal career, you contributed a percentage of every paycheck to FERS out of after-tax dollars. Because that money was already taxed, the IRS doesn't tax it again when it comes back to you as an annuity payment. The remainder — the government's portion and the investment earnings — is fully taxable ordinary income.

How the exclusion ratio works (Simplified Method)

For annuities starting after November 18, 1996, IRS requires the Simplified Method to calculate the tax-free portion. The monthly exclusion is:

Monthly exclusion = Total investment in contract ÷ Expected number of monthly payments

The "expected payments" divisor comes from an IRS table based on your age at retirement (from IRS Publication 721):

Source: IRS Publication 721, Table 1 (single life annuity).⁴ Once you've recovered your full investment, 100% of annuity payments become taxable.

How much did you actually contribute? (It's less than you think)

The size of your tax-free exclusion depends on your FERS tier:

• FERS (original, hired before 2013): 0.8% of basic pay per year. Over a 30-year career at an average $120,000 salary, that's roughly $28,800 in total contributions. Retiring at 58 (310 expected payments), your monthly exclusion is $28,800 ÷ 310 ≈ $93/month. Only about $1,116 of your annual annuity is tax-free.
• FERS-RAE (hired 2013): 3.1%. Same career: ~$111,600 contributed. Monthly exclusion ≈ $360/month ($4,320/year).
• FERS-FRAE (hired 2014 or later): 4.4%. Same career: ~$158,400 contributed. Monthly exclusion ≈ $511/month ($6,132/year).

For most FERS employees, 90–98% of your annual annuity is taxable ordinary income. Don't plan around a large exclusion.

CSRS retirees contribute approximately 7% of pay, so the CSRS exclusion ratio is meaningfully larger — typically 7–12% of the annuity is tax-free, depending on career length and salary history.

OPM withholding — set it proactively

OPM issues a Form 1099-R each January. Withholding is not automatic — it defaults to the equivalent of Single, no adjustments unless you file a W-4P with OPM. Many retirees owe a large tax bill in their first year because OPM's default withholding doesn't account for Social Security, TSP distributions, or other income. File a W-4P before or shortly after retirement to set the right withholding level.

Part 2: TSP Withdrawals — Fully Taxable (Traditional) or Fully Tax-Free (Roth)

Traditional TSP

Every dollar you contributed pre-tax and every dollar of investment growth is taxed as ordinary income when withdrawn. There is no exclusion ratio for TSP — 100% of traditional TSP distributions flow into your AGI. This is the same treatment as a traditional 401(k) or IRA.

Roth TSP

Qualified Roth TSP distributions are 100% tax-free. "Qualified" means the account is at least 5 years old AND you are at least 59½ (or the distribution is due to disability or death). Roth TSP also has no lifetime RMDs starting with the 2024 plan year — a change made by SECURE 2.0 § 325.⁵ This makes Roth TSP an excellent estate-planning tool if you don't need the funds.

RMDs from traditional TSP

You must begin required minimum distributions from your traditional TSP balance by April 1 of the year after you turn 73 (if born 1951–1959) or 75 (if born 1960 or later) — per SECURE 2.0 § 107.⁵ RMDs are calculated as your December 31 account balance divided by your Uniform Lifetime Table divisor. They are fully taxable in the year received. Large RMDs from a $1M+ TSP account can push a retiree into a higher bracket and trigger IRMAA surcharges (see Part 5).

The rollover decision

Many retirees roll the TSP to an IRA at retirement. The tax treatment is identical — traditional TSP to traditional IRA, Roth TSP to Roth IRA — so there's no immediate tax event. The reasons to roll over (more investment options, easier estate planning, beneficiary flexibility) or stay in the TSP (low expense ratios, G Fund uniqueness, creditor protection) are not tax-driven, but tax planning still matters: Roth conversions are harder to do inside the TSP.

Part 3: Social Security — Up to 85% Taxable

The IRS uses your combined income (also called provisional income) to determine what fraction of your Social Security benefit is taxable:

Combined income = Adjusted Gross Income + tax-exempt interest + 50% of Social Security benefits

These thresholds have not been adjusted for inflation since 1993.⁶ A retired GS-13 with a $38,000 annuity and $22,000 SS benefit has a combined income of approximately $49,000 — well above the 85% tier. Nearly every federal retiree with a full FERS annuity and Social Security will have 85% of their SS benefit subject to income tax.

The 85% figure doesn't mean an 85% tax rate. It means up to 85% of the benefit is included in your AGI and then taxed at your marginal rate (often 22%).

Part 4: The New OBBBA Senior Deduction (2025–2028)

The One Big Beautiful Bill Act (OBBBA, signed July 2025) created a new enhanced deduction for seniors in addition to the existing additional standard deduction:

• Amount: $6,000 per qualifying person aged 65 or older
• Joint filers: $12,000 if both spouses qualify
• Phaseout: Begins at $75,000 MAGI (single) / $150,000 (MFJ); fully phased out by $100,000 / $175,000
• Available to: Both itemizers and standard deduction filers
• Years: Tax years 2025, 2026, 2027, and 2028 only

Combined with the standard deduction and additional age-65 deduction, a single federal retiree turning 65 in 2026 with MAGI below $75,000 could have up to $24,150 in above-the-line and standard deductions before the phaseout starts. For a GS-12 retiree with a modest annuity, this can eliminate a substantial slice of taxable income.²

Part 5: IRMAA — How Your Annuity and TSP Distributions Affect Medicare Costs

IRMAA (Income-Related Monthly Adjustment Amount) surcharges are added to your Medicare Part B premium if your MAGI exceeds certain thresholds. For 2026, the first IRMAA tier begins at $109,000 MAGI (single) / $218,000 (MFJ), based on your 2024 income.³

What counts toward MAGI for IRMAA: FERS annuity, TSP traditional distributions, 85% of Social Security, taxable investment income, and any Roth conversion amounts. IRMAA is a cliff, not a gradual ramp — one dollar over a tier triggers surcharges on the entire year.

Common federal retiree trap: A senior federal employee with a $55,000 annuity, $28,000 TSP draw, and $22,000 Social Security has MAGI of roughly $97,700 — below the $109,000 first tier. But if they take a $15,000 TSP distribution to cover a home repair, MAGI spikes to $112,700 — triggering $81.20/month in extra Part B premiums for the entire following year. Timing large TSP withdrawals carefully can save hundreds per year.

See our FEHB + Medicare guide for a full IRMAA tier table and planning strategies.

Part 6: State Income Taxes on Federal Retirement Income

State tax treatment of federal pensions varies significantly. As of 2026:

• No state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming — FERS/CSRS annuities and TSP not subject to state tax.⁷
• Federal pensions fully exempt: Alabama, Hawaii, Illinois, Iowa, Mississippi, Pennsylvania — state law exempts federal government pensions from income tax.⁷
• Michigan (2026): Fully exempts pension income including federal pensions effective the 2026 tax year.⁷
• Most other states: Tax FERS annuity and TSP distributions as ordinary income, though some offer partial exemptions or deductions for retirement income after a certain age.

Where you retire can meaningfully affect your after-tax income. A GS-14 retiree in Virginia (which taxes federal pensions) vs. Florida pays roughly $5,000–$9,000 more per year in state income tax on the same annuity and TSP distributions.

Example: GS-14 Step 8, 30 Years of Service, Single Filer, Age 62

High-3: $145,000. FERS annuity (1% × $145K × 30): $43,500/year. Survivor election (50%): annuity reduced by 10% = $39,150/year. TSP traditional: $780,000, drawing $31,200/year (4% SWR). Social Security at FRA: $22,800/year.

Step 1 — Tax-free exclusion (FERS-FRAE hired 2014): Estimated contributions at 4.4% over 30 years, avg salary ~$120K = $158,400. Expected payments at age 62 (divisor 260) = $158,400 ÷ 260 = $609/month = $7,308/year tax-free. Taxable annuity: $39,150 – $7,308 = $31,842.

Step 2 — Social Security taxation: AGI before SS = $31,842 + $31,200 = $63,042. Combined income = $63,042 + (0.5 × $22,800) = $74,442. Above the $34,000 upper threshold → 85% of SS taxable. SS taxable = 0.85 × $22,800 = $19,380.

Step 3 — AGI: $31,842 + $31,200 + $19,380 = $82,422.

Step 4 — Deductions (single, age 62, not yet 65): Standard deduction $16,100. Taxable income = $82,422 – $16,100 = $66,322. Estimated federal tax ≈ $9,400 (approximately 14% effective rate).

IRMAA check: MAGI of $82,422 is below the $109,000 single threshold — no IRMAA surcharge in this scenario. But if this retiree takes an additional $30,000 TSP distribution, MAGI rises to ~$112,400 — just above the first IRMAA tier, adding $81/month to Medicare Part B costs.