State Income Tax on Your TSP Withdrawals and FERS Pension: 2026 Guide

Most federal employees understand the federal income tax rules on TSP distributions. Far fewer know that state income taxes vary dramatically — and that states which fully exempt your FERS pension annuity often still tax your TSP withdrawals as ordinary income. That gap can cost thousands annually and changes the math on Roth conversion timing, rollover decisions, and where you retire.

Why your FERS pension and TSP are taxed differently by states

This is the critical distinction that trips up federal employees planning retirement: your FERS pension annuity is a defined-benefit pension — a monthly payment from OPM. Your TSP balance is a defined-contribution account, functionally identical to a 401(k) for state tax purposes.

Many states created pension exemptions for retirees before 401(k)-type accounts became dominant. Those exemptions often cover "pension income" in the traditional sense — a monthly defined-benefit payment — but exclude 401(k) and IRA distributions. Since TSP is a defined-contribution plan, it frequently falls outside these pension exemptions, even in states that fully exempt your FERS annuity.

The practical consequence: a federal retiree drawing $30,000/year from their TSP in Alabama receives the FERS pension tax-free, then pays Alabama income tax on every dollar of that TSP withdrawal — the opposite of what many assume.

The cleanest situation: states with no income tax

Nine states impose no income tax at all. Both your FERS pension and TSP distributions are fully exempt by default:¹

Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming — no state income tax
New Hampshire — no tax on wages or retirement income (previously taxed investment income only; that tax phases out fully)
Tennessee — eliminated income tax on wages and distributions; fully in effect

Many federal employees with flexibility on where they retire relocate to Florida or Texas specifically for this reason. On a $60,000 TSP withdrawal, the difference between a 5% state rate (Maryland, Virginia) and 0% (Florida) is $3,000 per year — over $60,000 across a 20-year retirement before investment returns.

States that exempt both FERS pension and TSP distributions

Several states with income taxes have enacted exemptions broad enough to cover 401(k)-type distributions — meaning both your FERS annuity and TSP withdrawals are state-tax-free:

Illinois, Mississippi, Pennsylvania

These three states exempt all qualifying retirement income, including distributions from defined-contribution plans like TSP.¹ Pennsylvania applies a "normal retirement age" test — distributions must be from a retirement plan (TSP qualifies) and the recipient must have reached normal retirement age under the plan. Federal employees who separate before retirement age should verify their specific situation with a Pennsylvania tax professional.

Iowa

Iowa has been phasing out taxes on retirement income. Federal government pensions are now tax-exempt in Iowa, and Iowa has extended this treatment to 401(k) and IRA distributions as well, effectively exempting TSP distributions for federal retirees.¹

Michigan (2026)

Michigan has been phasing in a full retirement income exemption since 2023. As of the 2026 tax year, that exemption covers pensions and also applies to 401(k) plans, IRAs, and other defined-contribution accounts — including TSP.¹ Michigan federal employees who faced partial state taxation in prior years now benefit from the full exemption.

The trap: states that exempt your FERS pension but tax your TSP

This is where federal employees most frequently get surprised.

Alabama

Alabama explicitly exempts federal civil service pension income (FERS and CSRS annuities) from state income tax.³ However, Alabama treats TSP withdrawals like any other 401(k) distribution — they are subject to Alabama income tax at rates up to 5%.

One partial offset: Alabama provides a $12,000 retirement income exemption for retirees aged 65 and older starting in 2026 (doubled from $6,000). This applies to otherwise-taxable retirement income including TSP. But it is not a full exemption — Alabama retirees drawing substantial TSP income still pay state tax above that threshold.

Hawaii

Hawaii exempts federal pension income (including FERS and CSRS annuities) from state income tax.² However, Hawaii does not extend this exemption to 401(k)-type distributions. TSP withdrawals are subject to Hawaii income tax at rates that top out at 11% — among the highest state rates in the country.

Hawaii is an attractive retirement destination for many federal employees in the Pacific region. The pension exemption is real and valuable. But if you're planning significant TSP withdrawals, the absence of a corresponding TSP exemption substantially changes the after-tax picture.

The Alabama/Hawaii trap in numbers: A federal retiree in Alabama drawing a $45,000 FERS pension and $25,000 TSP annual withdrawal pays zero state tax on the pension — but owes roughly $1,150–$1,350 on the TSP income after the $12,000 exemption. In Hawaii at the same income split, TSP tax could approach $2,000–$2,800 annually depending on bracket. Neither state's pension exemption extends to the TSP.

High federal-employee states: Maryland, Virginia, and California

Maryland

Maryland is home to one of the largest concentrations of federal employees in the country. The state offers a pension exclusion — but it's capped and age-dependent, not a blanket exemption.

Maryland allows retirees to exclude a portion of pension income from state taxation: up to $41,200 for filers aged 65+ (the amount differs for younger retirees and phases out at higher incomes).⁴ Whether TSP distributions qualify for Maryland's pension exclusion alongside your FERS annuity depends on how Maryland classifies them. Maryland defines "pension income" broadly enough that distributions from qualified retirement plans (which TSP is) may qualify — but federal employees should verify their specific situation, particularly if combined FERS + TSP distributions push them above the exclusion cap.

What is certain: Maryland taxes retirement income above the exclusion at state rates of 2–5.75%, plus county income tax of up to 3.2%. Combined marginal rates of 8–9% are common in high-cost-of-living counties like Montgomery and Howard.

Virginia

Virginia has no specific pension or TSP exemption. Both your FERS annuity and TSP withdrawals are subject to Virginia income tax as ordinary income. Virginia's top rate is 5.75%, which applies to income over $17,000.⁴

Virginia does provide an age deduction — up to $12,000 of income for residents 65 and older — but this applies to all income, not specifically to retirement accounts. For a federal retiree with $60,000–$100,000 in combined retirement income, the age deduction offsets only a small portion of state tax.

California

California provides no exemption for federal pensions or TSP distributions. Both are fully taxable as ordinary income at California rates of 1–13.3%.¹

One notable exception: California does not tax Social Security income, even though it's taxable federally (above certain thresholds). For a federal retiree in California, this creates an income sequencing implication — drawing more from TSP and less from Social Security in early retirement years increases state tax; Social Security income is state-tax-free.

California also taxes in-plan Roth conversions as ordinary income in the year of conversion. A federal employee in California making a $50,000 in-plan Roth conversion could owe an additional $4,000–$6,500 in California income tax on top of federal tax, depending on their marginal rate. This is one of the strongest arguments for delaying Roth conversions until after establishing residency in a lower-tax state.

TSP doesn't withhold state income taxes — a first-year trap

When you start taking TSP distributions in retirement, TSP automatically withholds federal income tax. It does not automatically withhold state income taxes — even if you live in a state with a significant tax rate.⁵

The practical result: many new federal retirees receive their TSP distributions with federal tax withheld, assume their tax obligation is covered, and are surprised by a state tax bill the following April. In Maryland at a 9% effective rate, that surprise on $40,000 of TSP income is $3,600 — plus potential underpayment penalties.

How to fix it:

Request state withholding from TSP: You can elect voluntary state withholding on your TSP distributions by submitting a new withholding form. TSP will honor the request going forward.
Make quarterly estimated payments: If you prefer not to have TSP withhold, pay estimated state taxes quarterly — April, June, September, January — to avoid underpayment penalties.
Year-one planning: If you're retiring mid-year, your TSP withdrawals in the first year often combine with regular salary income from earlier in the year, potentially pushing you into a higher bracket than your steady-state retirement year. Build that into your withholding estimate.

Roth conversions and state tax: timing around state lines

If you're considering TSP in-plan Roth conversions — and many federal employees should, especially during the FERS Supplement gap years or before RMDs begin — your state of residence at the time of conversion determines the state tax on that conversion income.

If you plan to move to a no-tax state after retirement

Do not do large Roth conversions before you establish residency in the new state. A $60,000 in-plan Roth conversion done while still resident in Maryland costs roughly $5,400 in Maryland state tax. The same conversion done after establishing Florida residency costs $0 in state tax. For a planned sequence of $50,000–$70,000 in annual conversions over a 5-year window, that's $25,000–$40,000 in avoidable state tax.

If you plan to stay in your current state

Factor your state marginal rate into the fill-the-bracket analysis. If you're in Virginia (5.75% state) and you're filling the 22% federal bracket with conversions, your effective combined federal + state marginal rate on the conversion income is closer to 27–28%. That's still often worth it for the right profile — but the math changes relative to a federal-only analysis.

If you're already in a no-tax or full-exempt state

Your conversion cost is purely federal — the standard analysis applies. This is one of the reasons federal employees in Florida, Texas, and Pennsylvania often have more flexibility in their conversion strategies than those in high-tax coastal states.

How this interacts with the TSP rollover decision

The state you retire in can affect whether rolling your TSP to an IRA makes state-tax sense. If your state treats TSP and IRA distributions identically — as most do — the rollover decision is state-tax-neutral. But if your state has a specific exemption for "government pensions" that doesn't extend to IRA distributions, rolling your TSP to an IRA could increase your state tax burden on those same dollars.

This is rare, but verify: a small number of states grant pension exemptions specifically to government retirement plans that they don't extend to private IRAs funded via rollover. Before rolling your TSP to an IRA, confirm how your state treats distributions from each vehicle.

Planning summary by situation

Your situation	State tax on TSP	Key action
No-income-tax state (FL, TX, etc.)	$0	Roth conversions are federal-cost-only — favorable window
Full-exempt state (IL, MS, PA, IA, MI)	$0	Same as above — confirm your state's current rules annually
Pension-exempt but TSP-taxable (AL, HI)	Taxable at state rates	Budget for state tax on TSP; consider Roth TSP contributions while working
High-tax state (CA, MD, OR, MN)	Taxable at high rates	If moving to lower-tax state: delay Roth conversions. Set up state withholding or estimated payments.
Mid-tax state (VA, CO, AZ)	Taxable at moderate rates (3–6%)	Include state rate in fill-the-bracket Roth math; set up state withholding from TSP
Planning to move to a no-tax state	Zero after the move	Delay Roth conversions until after establishing new-state residency; time your first TSP distribution post-move

The state tax question is one piece of a larger plan

State income tax is a real number — often $2,000–$8,000 per year for a federal retiree drawing from TSP in a mid- or high-tax state. But it's one variable in a plan that also includes federal tax bracket management, Roth conversion timing, IRMAA two-year lookback on Medicare premiums, FERS Supplement earnings test, and Social Security claiming strategy. The interaction between these factors is where most of the planning value sits.

State tax laws also change. Iowa and Michigan both improved their retirement income treatment within the last few years. Maryland's pension exclusion amounts adjust periodically. Verify your state's current rules each year — and particularly before making any large Roth conversion or rollover decision that you can't reverse.

State income tax treatment of pensions and defined-contribution retirement plans: Kiplinger — 16 States Don't Tax Pension Income in 2026; Serving Those Who Serve — What States Tax Social Security, TSP, and Federal Pension.
Hawaii exemption for federal pension income; TSP distributions subject to Hawaii income tax (not covered by pension exemption): Kiplinger — Taxes in Retirement: How All 50 States Tax Retirees.
Alabama exemption for federal civil service pension income; TSP distributions taxable; $12,000 retirement income exemption for age 65+ effective 2026: Alabama Department of Revenue — Income Exempt from Alabama Income Taxation.
Maryland pension exclusion up to $41,200 for age 65+ (2025 figures; verify current year); Virginia 5.75% top rate and $12,000 age deduction for 65+: FedWeek — How Federal Retirement Income Is Taxed in 2026; FedPilot — Federal Retirement Tax Planning 2026.
TSP does not automatically withhold state or local income taxes from distributions; participants must request voluntary state withholding: TSP Publication 26 — Tax Rules about TSP Payments.

State tax laws change frequently. Values verified May 2026. Confirm your state's current treatment of TSP distributions and pension income with a tax professional or your state's department of revenue before making distribution, rollover, or Roth conversion decisions.