Key Takeaways:

• Most federal retirement income, including CSRS and FERS annuities and pre-tax TSP withdrawals, is subject to federal income tax; some states also tax federal pensions.
• Tax rules differ across benefit types, so understanding distinctions in taxation and required IRS forms is crucial for accurate reporting in 2026.

How to Understand Taxes on Federal Retirement Income and Annuity Benefits in 2026

Clarity around taxation of federal retirement income remains a crucial part of retirement planning. Federal retirement systems and annuity benefits—from pensions to the Thrift Savings Plan (TSP) and Social Security—are governed by clear, official rules. This guide lays out what to expect for the 2026 tax year, including key definitions, the nature of taxability for each income stream, and the latest reporting procedures. Understanding these concepts will help you better manage and anticipate your post-retirement income.

What Is Taxable Federal Retirement Income?

Definition of federal retirement income

Federal retirement income refers to payments you receive after you retire from federal service. This includes monthly benefits from the Civil Service Retirement System (CSRS), Federal Employees Retirement System (FERS), Social Security, and distributions from the Thrift Savings Plan (TSP).

Types of taxable and nontaxable benefits

Most regular monthly payments from CSRS and FERS are considered taxable income at the federal level. Withdrawals from the traditional (pre-tax) TSP are also taxable. However, if your retirement income includes contributions you made with after-tax dollars or certain disability benefits, those portions may be partially or fully nontaxable. Generally, post-tax Roth TSP withdrawals are not taxable when qualified. Disability retirement is subject to different tax treatment, especially before minimum retirement age.

How Are CSRS and FERS Annuities Taxed?

Overview of CSRS and FERS annuity rules

When you retire under CSRS or FERS, the monthly annuity payments you receive represent a combination of the contributions you made during your career and the government’s share. The Office of Personnel Management (OPM) determines your benefit.

Taxable portion of annuity payments

The majority of each annuity payment is taxable. However, a portion representing your contributions—money that was already taxed while you were a federal employee—can be excluded from taxable income using the IRS Simplified Method. Each year, you calculate the tax-free portion (your contributions) and the taxable portion, reporting only the latter as income. OPM provides detailed information on this breakdown via Form 1099-R.

What Taxes Apply to Thrift Savings Plan Withdrawals?

Tax treatment of TSP withdrawals

Withdrawals from the traditional TSP are taxed as ordinary income. The amount you receive is fully taxable unless you are withdrawing funds you contributed to a Roth TSP account or made limited after-tax contributions under certain rules. Roth TSP withdrawals are tax-free if they meet IRS qualifications: generally, you must be age 59½ or older and the Roth account must be at least five years old.

Required minimum distributions considerations

Like other retirement plans, the TSP requires minimum distributions beginning at age 73 in 2026 (subject to IRS regulations). Failing to take these required minimum distributions (RMDs) may result in tax penalties. The TSP notifies participants when RMDs are required, and distributions are reported for tax purposes each year on Form 1099-R.

How Is Social Security Income Taxed for Federal Retirees?

Taxability of Social Security for retirees

Federal retirees may pay federal income tax on a portion of their Social Security benefits. The amount that is taxable depends on your combined income, which includes your adjusted gross income plus nontaxable interest and half of your Social Security benefits. Based on IRS rules, up to 85% of your Social Security income may be taxable, but no more.

Factors affecting Social Security taxation

If your income from other sources (like pensions or the TSP) pushes you over certain IRS thresholds, you will owe federal income tax on part of your Social Security. These thresholds do not change based on your status as a former federal employee, but the combination of benefits can affect overall taxability.

Are Federal Pensions Taxed by States?

State taxation overview

While federal law governs the taxation of your retirement benefit at the national level, state tax rules vary. Some states tax federal pensions as income, while others offer exemptions, deductions, or exclusions for federal retiree income.

State-specific considerations

Several states exempt federal pension income fully or partially, but there are still many that treat these benefits as taxable. It’s important to consult updated state guidance for the 2026 tax year, as laws and policies can change over time. Most states follow the federal definition of taxable pension income, but their treatment of Social Security, TSP withdrawals, and survivor benefits may differ.

Do Federal Retirees Pay Medicare Tax on Pensions?

Applicability of Medicare taxes

Once you are retired and begin receiving your federal pension, those pension payments themselves are not subject to Medicare payroll tax. Medicare taxes are applied only to earned income—wages, salaries, or self-employment—not to pension distributions.

Distinction from payroll taxation

During your federal service, Medicare (and Social Security) taxes were withheld from your paycheck if you were subject to these programs. After retirement, the pension or annuity payments you receive are not considered earned income under IRS rules and thus are not subject to further payroll taxes. Your eligibility and premiums for Medicare benefits remain unaffected by the way your pension or annuity income is taxed.

What Tax Reporting Rules Do Retirees Follow?

Key IRS forms for federal retirement income

Common IRS forms include the 1099-R (for CSRS, FERS, and TSP distributions), SSA-1099 (for Social Security benefits), and standard federal tax returns (Form 1040). OPM will mail a 1099-R to you each year detailing your gross and taxable pension payments.

How to report various retirement benefits

You will report taxable portions of your pension, TSP withdrawals, and Social Security benefits on your annual federal income tax return. Non-taxable and excluded amounts—such as post-tax contributions recovered under the Simplified Method—are not included in taxable income. Official IRS instructions provide annual updates and worksheets for these calculations.

How Does Tax Withholding Work on OPM Payments?

Federal tax withholding options

Federal retirees can choose to have federal income tax withheld from OPM pension payments. You set your withholding preference at retirement and may adjust it at any time using the OPM Services Online platform or paper forms.

Managing withholding adjustments

If your tax situation changes, you can adjust the amount withheld to better match your anticipated tax liability. OPM supplies worksheets and online tools to help you choose the appropriate withholding. Unlike active employment, payroll taxes for Social Security and Medicare are not withheld from OPM retirement payments.

What Are Key Tax Considerations for Federal Retirees?

Common tax planning scenarios

You may encounter situations where you receive income from multiple sources—CSRS or FERS annuities, Social Security, and TSP withdrawals—each with different tax rules. Understanding how each stream is reported and taxed may reduce surprises at filing time.

Understanding phased retirement taxation

Under phased retirement provisions, federal employees who transition to part-time work receive a partial annuity and a salary. Salary is taxed as ordinary income and remains subject to payroll taxes, while the partial annuity is taxed according to standard retirement income rules.

Frequently Asked Questions on Federal Retirement Taxes

Common concerns about retirement income taxes

Many federal retirees wonder which benefits are taxable, how to avoid over- or under-withholding, and whether federal pensions impact Medicare premiums or Social Security taxes. Official IRS and OPM materials provide current answers for the 2026 tax year.

Clarifications on multi-benefit taxation

Receiving multiple federal retirement benefits does not change the taxable status of each payment. Instead, your total income may determine which benefits are taxable at the federal or state level, so a clear understanding of each source is essential for accurate reporting.