Key Takeaways
- FERS retirement benefits are subject to both federal and, in some cases, state income taxes, but taxation varies by component and jurisdiction.
- Recent tax law updates—including the Windfall Elimination Provision repeal—significantly impact how Social Security is taxed for federal retirees after 2025.
Nearly every federal retiree will encounter income taxes on at least part of their FERS benefits. Yet each component—from annuity to TSP to Social Security—follows different tax rules. Here’s a clear look at what to expect in 2026 after recent legislative changes.
What Is the FERS Retirement System?
FERS Overview and Purpose
The Federal Employees Retirement System (FERS) is the primary retirement system for most civilian federal employees hired after 1983. FERS was designed to provide retirement income, disability protection, and survivor benefits. It works by combining several components—the basic pension (FERS annuity), Social Security, and the Thrift Savings Plan (TSP)—to offer a balanced, multi-source approach to retirement security.
Key FERS Pension Components
When you retire under FERS, you typically receive monthly payments from three sources: the FERS basic annuity (sometimes called your pension), Social Security benefits, and distributions from your Thrift Savings Plan. Each component is governed by a separate set of rules—not just for calculating your benefits, but also for how each benefit is taxed.
How Are FERS Retirement Benefits Taxed?
Taxation of the Basic FERS Annuity
Your FERS annuity is generally treated as taxable income for federal tax purposes. The Office of Personnel Management (OPM) withholds federal income tax from your monthly payments unless you request otherwise. Part of each payment may be tax-free if you contributed to your pension with after-tax dollars. OPM provides you with a 1099-R form each year to report your annuity income and the taxable amount.
Thrift Savings Plan (TSP) Tax Rules
Withdrawals from your TSP can be subject to different tax rules depending on the type of contributions:
- Traditional (pre-tax) TSP: Distributions are fully taxable as ordinary income.
- Roth TSP: Qualified distributions—typically after age 59½ and at least five years since your first Roth contribution—are tax-free.
TSP will withhold federal income tax from most withdrawals. Required Minimum Distributions (RMDs) apply after age 73, and these are also subject to ordinary income taxes if from the traditional TSP.
Tax Implications for Social Security
Social Security benefits received as a federal retiree are taxed like those of other Americans. Up to 85% of your Social Security income may be taxable, depending on your “combined income” (which includes your FERS annuity, TSP withdrawals, and any other income). The elimination of the Windfall Elimination Provision in 2025 means your benefit is no longer subject to reductions based on your federal employment.
What Federal Income Tax Rules Apply?
Federal Tax Withholding Requirements
For the FERS annuity and TSP, federal law requires income tax withholding unless you opt out (subject to certain limits). Social Security withholding is voluntary and must be requested. The OPM and TSP allow you to adjust your withholding to match your specific tax situation. Remember, any tax due beyond withheld amounts must be paid when you file your annual return.
Reporting FERS Income on Your Return
You will receive IRS Form 1099-R from the OPM (for your annuity) and from the TSP (for withdrawals). These forms detail your total and taxable income for the year. Social Security will issue a Form SSA-1099. All three sources must be included on your annual federal tax filing as ordinary income, with the exception of any previously taxed base in your annuity or tax-free Roth TSP withdrawals.
What Changed About FERS Taxes in 2026?
Recent Federal Tax Law Updates
Several changes from recent federal tax legislation now affect FERS retirees. Tax brackets for ordinary income—including those applying to federal pensions and most TSP withdrawals—were updated in 2026 under current law. RMD ages, catch-up contributions, and withholding tables may also have been revised pursuant to legislative updates or IRS guidance. It’s important to check the latest available information each tax year.
Windfall Elimination Provision Repeal
A significant change took effect in 2025: the Windfall Elimination Provision (WEP) was repealed. Before 2025, WEP could reduce Social Security payments for some federal retirees, especially those who also received a pension based on government work. Now, all FERS retirees receive Social Security benefits based solely on their earnings history, without a WEP reduction. This means your Social Security benefits are no longer decreased due to your federal service under FERS.
Are FERS Benefits Taxed by States?
State-by-State Tax Considerations
State income tax treatment of FERS benefits can vary widely. Some states fully tax public pensions, some offer partial exclusions or age-based reductions, and others exempt federal retirement benefits entirely. It’s important to research your specific state’s tax code, as moving after retirement could impact your after-tax FERS income.
Common State Policies for Retirees
Common state-level policies include:
- Full or partial exemption of federal pension income
- Full taxation of TSP distributions unless rolled into another tax-advantaged account
- Different thresholds for the taxation of Social Security Some states, like Florida, Texas, and Nevada, have no state income tax at all. Others, such as Virginia and North Carolina, allow partial exemptions for federal retirees.
Checking with your state’s Department of Revenue or official government sources is the most reliable way to determine your potential state tax bill.
What If You Retire Before Age 59½?
Early Withdrawal Penalties Explained
Leaving federal service can mean accessing TSP funds before reaching age 59½. Normally, distributions from traditional retirement accounts (including TSP) before this threshold are subject to an IRS 10% early withdrawal penalty, on top of regular income taxes. This rule is designed to encourage savings for retirement rather than early withdrawals.
Exceptions for Federal Retirees
Federal retirees have a few unique exceptions. If you separate from service during or after the calendar year you turn 55 (or age 50 for certain law enforcement and public safety employees), TSP withdrawals are not subject to the 10% early withdrawal penalty. However, early FERS annuity payments themselves do not trigger a penalty—the regular FERS annuity is not subject to this IRS rule. Social Security cannot be taken before your eligibility age, regardless of separation timing.
