How Federal Retirement Income Is Taxed

Most federal employees are surprised by how much of their retirement income is taxable — and frustrated to discover that the rules differ for each income stream. Your FERS pension, the FERS supplement, your TSP withdrawals, and Social Security are all taxed under different regimes. Stack them together without a plan and you can easily climb into a higher bracket than you expected, trigger IRMAA Medicare surcharges, or cause up to 85% of your Social Security to become taxable.

This guide explains exactly how each stream is taxed, how they interact, and what you can do now (before you retire) to reduce the bill.

1. FERS Basic Annuity: Mostly Taxable, but Not All of It

Your FERS pension was funded from two sources: a large agency contribution (pre-tax dollars you never saw) and a smaller employee contribution withheld from your paycheck. Those employee contributions were already subject to federal income tax when you earned them. You can't be taxed twice on them — so the IRS lets you recover that after-tax basis tax-free using the Simplified Method.¹

Your employee contribution rate depends on when you were hired:

The monthly exclusion equals your total employee contributions divided by your expected number of monthly payments (based on your age at retirement under IRS Publication 721 Table 1). For most federal retirees, the exclusion is modest — $50–$200/month. Once you've recovered your entire cost basis, every dollar of pension becomes fully taxable.

The practical result: the vast majority of your FERS annuity is taxable federal income. A 30-year employee hired before 2013 who contributed 0.8% on a $90,000 average salary built roughly $21,600 in basis — recovered over 310 months at about $70/month. The other $2,000–$3,000/month of pension is ordinary taxable income from day one.

For the full Simplified Method calculator, see the FERS pension tax exclusion guide.

2. FERS Special Retirement Supplement: 100% Taxable — Not Like Social Security

The FERS supplement mimics a partial Social Security payment and gets deposited alongside your pension — but it is not treated like Social Security for tax purposes. It is fully taxable as ordinary income, reported on your 1099-R in Box 5, subject to regular income tax withholding, and not subject to the provisional-income formula that shelters 0–15% of actual SS benefits.²

This surprises many new retirees. A federal retiree collecting $2,800/month in pension plus $1,100/month in supplement has $3,900/month of effectively ordinary taxable income before the pension exclusion. The supplement doesn't get the favorable SS tax treatment.

The supplement also stops automatically at age 62 regardless of when you claim Social Security. At that point — if you haven't started SS yet — your taxable income actually drops for a window before Social Security begins. That window is a potential Roth conversion opportunity. See the FERS supplement guide for details.

3. TSP Withdrawals: Traditional vs. Roth

Traditional TSP: 100% Taxable

Every dollar withdrawn from a traditional (pre-tax) TSP is fully taxable as ordinary income in the year you take it.³ There is no cost-basis recovery like the FERS pension — your TSP contributions were made pre-tax, so the IRS has never touched them. Rollover to a traditional IRA doesn't change this; IRA withdrawals are also fully taxable.

TSP withholds 20% on most distributions classified as "eligible rollover distributions" — including lump-sum withdrawals and certain installment payments. For installment payments expected to last 10+ years, TSP uses W-4P withholding rates (default: single/0 allowances for installments set up after January 1, 2023).

Roth TSP: Tax-Free If Qualified

Roth TSP contributions were made after tax. Qualified withdrawals — meaning you are age 59½ or older and your Roth TSP account has been open for at least 5 tax years — are 100% tax-free, including all the growth.⁴ Non-qualified Roth withdrawals are tax-free on contributions but earnings are taxable.

Key distinction: the TSP 5-year clock starts on January 1 of the first year you made a Roth TSP contribution. It is separate from the 5-year clock that applies to Roth IRAs. When you roll Roth TSP to a Roth IRA at separation, the Roth IRA 5-year clock applies to the IRA account thereafter.

Since January 28, 2026, TSP now offers in-plan Roth conversions — you can move traditional TSP balance to Roth TSP directly, up to 26 times per year. That conversion is a taxable event in the year you do it, but all future growth on the converted amount becomes Roth. Use the TSP Roth conversion calculator to see how much to convert each year.

4. Social Security: 0%, 50%, or Up to 85% Taxable

Social Security benefits are taxed based on your provisional income — a formula that doesn't appear on any tax line but determines whether your benefits are taxable. The formula:⁵

Provisional Income = AGI (excluding SS) + tax-exempt interest + ½ × SS benefit

The thresholds — set by Congress in 1983 and never inflation-adjusted — determine your tax tier:

For most FERS retirees with pension + TSP income, provisional income will exceed $34,000 (single) or $44,000 (MFJ) — meaning up to 85% of their Social Security is taxable. But it's never 100%. The 15% exclusion is permanent regardless of income.

The FERS supplement does not count like Social Security in this formula — it's included in AGI as ordinary income, which pushes provisional income higher and thus makes more of your actual SS taxable once you start claiming. See the federal employee Social Security guide for claiming-age math.

The Income-Stacking Problem

Here's the scenario many FERS retirees hit: $36,000 in FERS pension + $12,000 in FERS supplement + $24,000 from traditional TSP + $24,000 in Social Security. Before the pension exclusion and standard deduction, that looks like:

• FERS pension: $36,000 (minus ~$840 exclusion ≈ $35,160 taxable)
• FERS supplement: $12,000 (100% taxable)
• Traditional TSP: $24,000 (100% taxable)
• Provisional income: $35,160 + $12,000 + $24,000 + ½ × $24,000 = $83,160
• Since $83,160 > $44,000 (MFJ), up to 85% of SS is taxable → $20,400 taxable SS
• Total gross income: $35,160 + $12,000 + $24,000 + $20,400 = $91,560
• Minus standard deduction ($32,200 MFJ): $59,360 taxable income
• Federal tax at 2026 MFJ rates: approximately $6,700

That's a manageable 12% effective rate. But add $40,000 of traditional TSP withdrawals for a home purchase or large expense and you could push into the 22% bracket — and you'd have triggered more SS taxation along the way.

IRMAA: When Your Retirement Income Raises Your Medicare Premiums

Medicare Part B premiums are determined by your modified AGI from two years prior. The base 2026 premium is $185.00/month per person. If your 2024 MAGI exceeded $109,000 (single) or $218,000 (MFJ), you pay an IRMAA surcharge on top of that.⁶

Traditional TSP withdrawals count toward MAGI. A federal employee who retires at 63 with high income in their last working year — salary + TSP in-service withdrawal + large leave payout — may set off a two-year IRMAA wave that begins just as they turn 65 and enroll in Medicare. Planning large withdrawals in lower-income years (for example, the supplement gap year when SS hasn't started) can reduce lifetime Medicare premiums significantly.

Federal Retirement Tax Estimator (2026)

Enter your expected annual income from each source. The calculator estimates your taxable Social Security, total taxable income, and approximate 2026 federal tax. It is not a substitute for working with a CPA — but it shows how your income sources interact.

Three Tax-Reduction Strategies for FERS Retirees

1. Roth Conversions Before RMDs Hit

From the time your FERS supplement ends (or you stop working) until age 73 or 75, you have a window where your taxable income may be lower than it will be once Required Minimum Distributions begin. A $40,000 traditional TSP balance forced out as an RMD at 75 — on top of pension + SS — could push you into the 22% or 24% bracket. Converting $20,000–$30,000/year to Roth TSP in the years before RMDs reduces that future forced income. The cost is paying 12–22% today to avoid paying 22–24% later.

Use the TSP Roth conversion calculator to find your annual conversion room without crossing into a higher bracket or triggering IRMAA.

2. SS Delay Reduces Provisional Income in Early Retirement Years

Every year you delay Social Security past 62 increases your benefit by about 5–8%/year. But delaying also keeps SS out of your provisional income calculation in the delay years — meaning more of your pension and TSP can be taken before you hit the 85% SS taxation tier. If you retire at 58 with pension + supplement and delay SS to 67, your provisional income in years 58–67 contains no SS at all, which can keep more of your retirement income out of the 85% zone once SS starts at a higher benefit.

3. State Income Tax Planning

Several states fully or partially exempt federal pensions, and the FERS supplement is generally treated like the pension for state tax purposes. TSP withdrawals get state treatment like any defined-contribution plan withdrawal. If you're considering relocating in retirement, the state tax difference on a combined $60,000/year federal retirement income can be $3,000–$6,000/year. See the TSP state income tax guide for a state-by-state breakdown.

Key Tax Facts at a Glance (2026)

Sources

1. IRS Publication 721: Tax Guide to U.S. Civil Service Retirement Benefits — Simplified Method for federal annuities, including FERS employee contribution tiers.
2. PlanWell Financial Planning: How the FERS Supplement Is Taxed — confirms FERS supplement is fully taxable as ordinary income, not subject to the SS provisional income formula or FICA.
3. TSP Publication 536: Important Tax Information About Payments from Your Thrift Savings Plan Account — TSP distribution tax treatment, 20% withholding on eligible rollover distributions.
4. IRS Publication 590-B: Distributions from Individual Retirement Arrangements — Roth 5-year rule and qualified distribution requirements (applicable to Roth TSP by statute).
5. SSA.gov: Benefits Planner — Income Taxes and Your Social Security Benefit — provisional income thresholds: $25,000/$34,000 single; $32,000/$44,000 MFJ. Unchanged since enacted; verified 2026.
6. CMS.gov: Medicare 2026 Costs — 2026 Part B base premium $185/month; IRMAA Tier 1 thresholds $109,000 single / $218,000 MFJ.

Tax values verified against 2026 sources: IRS Rev. Proc. 2025-32 (brackets, standard deductions), SSA.gov (SS provisional income thresholds, unchanged since 1984), CMS.gov (IRMAA 2026 thresholds), IRS Publication 721 (FERS Simplified Method), TSP Publication 536 (withholding rules).