How your FERS retirement income is taxed

Yes, most of it. Retirement doesn’t end your tax bill; it changes what gets taxed. Most federal retirement income is taxed as ordinary income (the same rates that apply to a paycheck). A few parts get special treatment, and one part may not be taxed at all.

This is where tax diversification helps. Holding balances that are taxed differently lets you choose, year by year, which account to draw from. Traditional TSP money is taxed on the way out, while qualified Roth money isn’t. That choice is a hedge against future tax rates you can’t predict.

The federal rules are the same in every state. What changes from state to state is whether your state adds its own tax, and state treatment gets its own section near the end.

Want numbers instead of rules? The RetireCiv calculator has an optional taxes and deductions estimate, which you turn on in the Benefits step. On the Pro plan, the dashboard then shows your projected income both gross and net of estimated taxes.

Here’s the short version by source, before the detail on each one.

• FERS pension: ordinary income, minus a small tax-free return of your own contributions.
• Special Retirement Supplement (SRS): fully taxable as ordinary income.
• Traditional TSP withdrawals: taxable as ordinary income.
• Roth TSP withdrawals: tax-free when qualified.
• Social Security: up to 85% taxable, depending on your other income.

Your FERS pension is taxed as ordinary income, with one carve-out. A small part of each monthly payment is a tax-free return of the contributions you made while working. You already paid tax on those dollars, so the IRS doesn’t tax them twice.

The IRS spreads that tax-free amount across your retirement using the Simplified Method. It divides your total contributions by a number of months based on your age at retirement (a younger retiree gets more months, and so a smaller monthly amount). The result is a fixed monthly amount that comes back tax-free until your contributions are fully recovered.

For most FERS retirees, the tax-free part is small. FERS employees contribute a low percentage of pay toward the pension, so the dollars to recover are modest. The bulk of your pension, funded by the government and by investment returns, is taxable.

One more rule matters over time. Once you’ve recovered your total contributions tax-free, every later payment is fully taxable. The tax-free part doesn’t last forever; it stops when your cost is paid back.

The answer turns on the type of money. Traditional TSP withdrawals are taxed as ordinary income, because you deferred tax when you contributed. Qualified Roth TSP withdrawals are tax-free because you already paid tax on those contributions. This is the Traditional versus Roth choice, seen from the withdrawal end.

A Roth withdrawal is tax-free only when it is qualified. Two things must be true: five years have passed since January 1 of the year of your first Roth contribution, and you’re at least 59 and a half. Meet both, and your Roth contributions and their earnings come out tax-free.

Required minimum distributions add a wrinkle to traditional money. Starting at an age set by law (73, or 75 if you were born in 1960 or later), the IRS requires you to withdraw a minimum amount from a traditional balance each year. Those withdrawals are taxed as ordinary income.

Roth TSP money is treated differently for RMDs. Since your Roth balance is no longer subject to lifetime required minimum distributions, you can leave qualified Roth money in the plan and let it keep growing tax-free.

The Special Retirement Supplement (SRS) is fully taxable as ordinary income. OPM pays it as part of your FERS annuity from retirement until age 62. It’s taxed the same way the rest of your pension is, with no tax-free portion of its own.

Keep in mind that the SRS approximates a Social Security benefit, but it isn’t Social Security for tax purposes. The rule that taxes only up to 85% of Social Security doesn’t apply to the supplement.

So treat the SRS as ordinary income in full: when you estimate your retirement taxes, count the whole supplement, not a reduced share. It stops at 62, when Social Security itself can begin.

Up to 85% of your Social Security can be taxable, and the share depends on your other income. Below a first income level none of your benefit is taxed, and in a middle band up to half is taxable. Above a higher level, up to 85% is taxable.

The test uses combined income. That’s your adjusted gross income, plus any tax-exempt interest, plus one-half of your annual Social Security benefits. Your FERS pension and traditional TSP withdrawals count toward that figure.

The income levels that set the bands are fixed by law and differ by filing status. Because those levels aren’t adjusted for inflation, more retirees cross them over time. The SSA worksheet shows the current amounts for your filing status.

One planning point follows from this. Drawing from a qualified Roth account doesn’t add to combined income, while a traditional TSP withdrawal does. The order you tap your accounts can change how much of your Social Security is taxed. The Social Security claiming lesson covers the timing side.

Your state decides that. Federal rules are the same everywhere, but states set their own treatment, and they vary widely. Where you retire can change your tax bill even if your federal income is identical.

States fall into three broad groups. Some have no state income tax at all. Some have an income tax but exempt government or all retirement income, in whole or in part, and others tax retirement income much like wages.

This is worth checking before you choose where to retire. A pension that’s lightly taxed in one state can be fully taxed across a border. Confirm your state's rules with its tax agency, since they change and often have age or income conditions.

• No state income tax: your FERS income faces no state tax.
• Exempts retirement income: the state taxes wages but shields some or all pension and TSP income.
• Taxes it like wages: your FERS income is taxed at regular state rates.

You pay as the income comes in, through withholding or estimated payments. The IRS expects tax during the year, not just at filing. The simplest path is to have tax withheld from your annuity and your TSP withdrawals.

OPM can withhold federal income tax from your monthly annuity, and state income tax too if your state takes part in OPM's State Tax Withholding Program. You set the amount and can change it as your income shifts. The TSP also withholds on most withdrawals, though the default may not match what you actually owe.

Social Security can also withhold federal tax if you ask, and many federal retirees set voluntary withholding on their benefit so it isn’t a surprise at filing.

If your withholding falls short, you cover the gap with quarterly estimated payments to the IRS. Underpaying through the year can trigger a penalty, so it pays to check your total once your income settles. To see how your retirement income comes together, run your free readiness score, then confirm the tax details with the IRS or a tax professional.