Federal retirement taxes, and the surprise most retirees don't see coming

This is where the biggest, most avoidable federal retirement mistakes hide. Your pension, TSP, and Social Security are each taxed differently, and how you coordinate them, and time your retirement date, can change your lifetime tax bill dramatically.

Your three income sources are taxed differently

Federal retirement income does not arrive as one uniform paycheck. Each source has its own tax treatment, and the interaction between them is where most of the planning opportunity lives.

• FERS pension. Almost entirely taxable as ordinary income at the federal level. A tiny portion may be tax-free (your already-taxed contributions), but for most retirees the pension is effectively fully taxable. When it begins in the same year as your final salary, the combined income often exceeds what you earned while working.
• TSP withdrawals. Traditional TSP withdrawals are fully taxable as ordinary income. Roth TSP qualified withdrawals are tax-free. Which balance you draw from, and when, is one of your biggest levers.
• Social Security. Up to 85% of your benefit can be taxable, depending on your other income. Large traditional-TSP withdrawals can push more of your Social Security into the taxable range.

The retirement year tax trap

The most expensive tax mistake federal employees make is retiring mid-year without understanding how income stacking creates a massive tax bill. A GS-13 couple retiring mid-year can easily stack 6 months of salary, an annual leave payout, pension payments, and TSP withdrawals into a single year, totaling $200,000 or more in taxable income and pushing them into higher brackets than any working year.

• Mid-year retirement disaster. Six months of salary plus a lump-sum annual leave payout plus a new pension plus early TSP withdrawals can combine into the highest-income tax year of your life, in the very year you stop working.
• Annual leave payout trap. Your accumulated annual leave is paid out as a lump sum in the year you retire. Combined with your salary, this alone can push you into a higher bracket. Timing this payout strategically is critical to minimizing the tax impact.
• Pension taxation reality. Your FERS pension is nearly 100% taxable as ordinary income. When it begins in the same year as your final salary, the combined income can create the tax surprise most retirees never anticipated.

The December 31st strategy

December 31st is the optimal retirement date for most federal employees from a tax perspective. By retiring on the last day of the year, all pension income, TSP withdrawals, and Social Security benefits are pushed into the following calendar year, a year with zero salary income. This avoids stacking retirement income on top of a partial year of salary. The potential one-year savings range from $5,000 to $15,000 or more.

Key 2026 tax reference figures

• Standard deduction (married filing jointly): $31,500.
• Standard deduction (single): $24,150.
• 22% bracket starts (MFJ): $96,951.
• 24% bracket starts (MFJ): $206,701.
• IRMAA threshold (single): $109,000.
• IRMAA threshold (MFJ): $218,000.
• TSP in-plan Roth conversion: available January 2026.
• Mandatory Roth catch-up threshold: $150,000 of prior-year wages.

IRMAA: the tax on your tax

IRMAA (the Income-Related Monthly Adjustment Amount) is a Medicare premium surcharge based on your modified adjusted gross income from two years prior. At the first tier, Part B jumps to $284.10 per month per person, and the full surcharge range runs from roughly $81 to $487 per month. Strategic retirement timing and income management can help you avoid these surcharges entirely.

• Single threshold begins at $109,000; married-filing-jointly threshold begins at $218,000.
• Because IRMAA looks back two years, income you generate today can raise your Medicare premiums later.
• If a life-changing event such as retirement significantly reduces your income, you can file Form SSA-44 to ask Medicare to use your more recent, lower income instead of the higher income from two years ago.

Roth conversions for federal employees

Traditional gave you a deduction now and taxes you later; Roth taxes you now and is tax-free later. Many federal employees retire with almost everything in traditional, which can mean higher taxes exactly when they have the least flexibility. In-plan Roth conversions are now available directly within the TSP as of January 2026. The window between retirement and RMDs at age 72-73 often represents the lowest-income years of your life, the ideal time to convert traditional TSP to Roth.

• Convert during low-income years before RMDs begin.
• Fill lower tax brackets without triggering IRMAA thresholds.
• Roth withdrawals are tax-free in retirement, and Roth balances carry no lifetime RMDs.
• Reduce your future taxable income and the size of eventual RMDs.
• Note the mandatory Roth catch-up rule, which applies once prior-year wages exceed $150,000.

Required Minimum Distributions (RMDs)

• Traditional TSP and traditional IRA balances are subject to RMDs beginning at age 73 (rising to 75 later this decade).
• RMDs are taxable and can be large if your traditional balance has grown untouched, sometimes pushing you into a higher bracket.
• Roth balances are not subject to RMDs during your lifetime, another reason the mix matters.

Where you live changes everything: state taxes

State tax treatment of federal pensions varies dramatically. Some states fully tax your FERS pension, while others exempt it entirely. The difference can mean $5,000 to $8,000 per year in additional taxes, or savings.

• No income tax states. Texas, Florida, Nevada, and Wyoming impose no state income tax on any retirement income, offering the most straightforward savings on pensions, TSP withdrawals, and Social Security.
• Pension exemption states. Several states offer partial or full exemptions for government pensions even if they have an income tax. Utah, for example, taxes retirement income but offers a retirement tax credit that phases out at higher incomes.
• Relocation analysis. Moving to a tax-friendly state in retirement could save tens of thousands over your lifetime. The real decision factors in cost of living, not just tax rates.

The opportunity: coordinate, don't autopilot

Filling lower tax brackets with strategic withdrawals or Roth conversions in your early retirement years, before Social Security and RMDs stack on top, can lower the total tax you pay over retirement. Combined with a smart retirement date and awareness of IRMAA and state taxes, this is the gap federal employees are rarely warned about, and it is very hard to fix after the fact.

Retirement tax FAQ

Is my FERS pension fully taxable?

Nearly all of your FERS pension is taxable as ordinary income. A small portion of each payment represents a return of your after-tax employee contributions and is not taxed, but for most retirees this non-taxable portion is minimal. The vast majority of your FERS annuity will be reported as taxable income on your federal and potentially state tax return each year.

What is the best month to retire for tax purposes?

December 31st is the optimal retirement date for most federal employees from a tax perspective. By retiring on the last day of the year, all pension income, TSP withdrawals, and Social Security benefits are pushed into the following calendar year, a year with zero salary income. This avoids stacking retirement income on top of a partial year of salary, which can push you into higher tax brackets and trigger Medicare IRMAA surcharges. The potential savings range from $5,000 to $15,000 or more in a single year.

How can I avoid IRMAA surcharges on Medicare?

IRMAA surcharges are based on your modified adjusted gross income from two years prior. To avoid them, manage your income strategically in the years used for IRMAA determination, carefully timing TSP withdrawals, Roth conversions, and other income events. If you experience a life-changing event such as retirement that significantly reduces your income, you can file Form SSA-44 to appeal and request that Medicare use your more recent, lower income instead.

Should federal employees do Roth conversions?

Roth conversions can be extremely valuable for federal employees, especially during lower-income years between retirement and the start of Required Minimum Distributions at age 72-73. This window often represents the lowest tax bracket years of your life. Converting traditional TSP funds to Roth during this period, while staying within lower brackets and below IRMAA thresholds, can save significant taxes over your lifetime. As of January 2026, in-plan Roth conversions are available directly within the TSP.

Are TSP withdrawals taxable?

Traditional TSP withdrawals are 100% taxable as ordinary income, every dollar withdrawn is added to your taxable income for that year. Roth TSP withdrawals, however, are completely tax-free if they are qualified distributions, meaning your Roth account has been open for at least 5 years and you are age 59 and a half or older. This fundamental difference makes Roth conversion planning a critical component of federal retirement tax strategy.