Federal Retirement Tax 2026: What FERS Employees Need to Know Before They Retire

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The federal retirement tax 2026 framework requires FERS retirees to pay ordinary federal income tax on their FERS annuity, traditional TSP withdrawals, and up to 85% of Social Security benefits. A small portion of each annuity payment representing previously taxed contributions is recovered tax-free under the IRS Simplified Method. Understanding how each income stream is taxed, and how state rules layer on top, is one of the most important steps in projecting your real, after-tax retirement income before you submit your retirement application to OPM, the U.S. Office of Personnel Management.

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This guide explains how federal retirement income is taxed in 2026 for employees under FERS, the Federal Employees Retirement System. It covers the four income streams most retirees draw from, the federal and state tax treatment of each, the FERS Annuity Supplement, Required Minimum Distributions from the TSP, and the planning moves that reduce lifetime tax liability.

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At Federal Pension Advisors, a retirement planning firm specializing in federal employee benefits, the most common pre-retirement mistake we see is underestimating taxes on the combined FERS-plus-TSP-plus-Social-Security income stack. If you're starting from scratch, our complete federal retirement planning roadmap walks through the full sequence.

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How Federal Retirement Income Is Taxed in 2026

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A federal retiree under FERS, the Federal Employees Retirement System, typically draws from four taxable or partially taxable sources. These are the FERS basic annuity, the TSP (Thrift Savings Plan, the federal government's tax-advantaged retirement savings program), Social Security benefits, and the FERS Annuity Supplement for those who retire before age 62 with eligible service.

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Each source is taxed under different rules. The interaction between them determines a retiree's effective tax bracket.

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The FERS basic annuity is treated as ordinary income at the federal level. A small portion of each monthly payment, representing the after-tax contributions you made during your career, is excluded from tax under the IRS Simplified Method described in IRS Publication 721.

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According to the Internal Revenue Service, the IRS calculates this excluded portion by dividing your total after-tax contributions by an age-based expected return factor. The remainder of each payment is fully taxable.

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Traditional TSP withdrawals are also taxed as ordinary income because contributions and earnings grew tax-deferred. Roth TSP withdrawals are tax-free at the federal level if the account is at least five years old and you're age 59½ or older.

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Social Security benefits are partially taxed based on combined income. According to the Social Security Administration, up to 85% of benefits become taxable when your combined income exceeds $34,000 filing single or $44,000 filing jointly.

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Federal Tax Brackets for 2026 and Why They Matter to FERS Retirees

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The IRS adjusts federal income tax brackets annually for inflation under the Tax Cuts and Jobs Act framework. For tax year 2026, the IRS announced inflation-adjusted brackets that affect every federal retiree drawing FERS, TSP, and Social Security income simultaneously.

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According to the Internal Revenue Service, the standard deduction for tax year 2026 is $16,100 for single filers and $32,200 for married couples filing jointly. Filers age 65 or older filing single get an additional $2,050.

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Many FERS retirees may fall into the 12% or 22% federal bracket once their combined annuity, TSP withdrawals, and Social Security are calculated. Your actual bracket depends on filing status, deductions, TSP withdrawal size, the taxable portion of Social Security, and any spousal income.

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According to the Internal Revenue Service, for tax year 2026 the 22% bracket begins at $50,401 of taxable income for single filers, and the 24% bracket begins at $105,701. Many higher-grade retirees cross these thresholds in the first full year of retirement, particularly if they take a large initial TSP distribution.

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Federal Pension Advisors, a retirement planning firm specializing in federal employee benefits, recommends modeling at least three withdrawal scenarios before retiring. Drawing too aggressively from a traditional TSP in the first year often pushes you into a higher bracket than necessary. It also increases the taxable portion of Social Security in the same year.

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Comparing the Tax Treatment of Each FERS Retirement Income Stream

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The table below summarizes how the IRS treats each retirement income source for federal tax purposes in 2026.

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Source: IRS Publication 721, IRS Publication 915, and OPM, the U.S. Office of Personnel Management, retirement information series.

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The FERS Annuity Supplement and Its Tax Treatment

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The FERS Annuity Supplement, sometimes called the Special Retirement Supplement (SRS), is paid to FERS retirees who retire before age 62 with eligible immediate retirement. It bridges the gap until Social Security becomes available.

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OPM, the U.S. Office of Personnel Management, calculates the supplement using an estimate of the Social Security benefit attributable to federal service. If you're not sure when you can retire under FERS rules, our FERS retirement age guide covers eligibility by birth year.

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The FERS Annuity Supplement is 100% taxable as ordinary federal income. None of it is recovered tax-free.

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According to OPM, the U.S. Office of Personnel Management, the supplement is also subject to the Social Security earnings test. Earned income above the annual exempt amount reduces the supplement by $1 for every $2 earned over the threshold. Pension income, TSP withdrawals, and rental income don't count toward the earnings test, but wages and self-employment income do.

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A common planning oversight is failing to budget for the loss of the supplement at age 62. It ends regardless of whether you actually file for Social Security. Replacing that income typically requires either claiming Social Security or increasing TSP withdrawals, and both options have their own tax consequences.

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TSP Withdrawals and Required Minimum Distributions in 2026

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The IRS taxes withdrawals from a traditional TSP account as ordinary income in the year received. TSP withholding depends on the type of withdrawal.

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According to the Thrift Savings Plan, eligible rollover distributions paid directly to the participant are generally subject to 20% federal withholding. Other payment types may follow different withholding rules. Qualified Roth TSP distributions are federally tax-free when the five-year rule and the age, disability, or death requirements are met. For a deeper breakdown, see our guide to Roth TSP withdrawal rules.

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Under the SECURE 2.0 Act, the Required Minimum Distribution (RMD) age is 73 for individuals born between 1951 and 1959. It rises to 75 for those born in 1960 or later.

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According to the Internal Revenue Service, RMDs from a traditional TSP must begin by April 1 of the year following the year you reach the applicable age. The penalty for failing to take an RMD is 25% of the shortfall, reduced to 10% if corrected within a defined window. According to the Thrift Savings Plan, Roth TSP balances are no longer subject to lifetime RMDs, so RMD calculations now apply only to the traditional balance.

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High earners approaching retirement should monitor the Roth catch-up rule for 2026 planning. According to the Internal Revenue Service, the Roth catch-up requirement applies beginning in 2026 for participants with prior-year wages above $150,000 when the plan offers Roth features. Final regulations generally apply to taxable years beginning after December 31, 2026, subject to transition and plan-specific details.

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If you're still working and making catch-up contributions, this changes whether the catch-up grows tax-deferred or tax-free. That shifts the long-term tax picture. Our federal employees guide to TSP contribution covers the active-duty side of these rules.

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Federal Pension Advisors, a retirement planning firm specializing in federal employee benefits, frequently sees retirees benefit from partial Roth conversions in the gap years between retirement and the applicable RMD age. That's a period when taxable income is often at its lifetime low.

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State Taxation of FERS Retirement Income

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State tax treatment varies dramatically and can shift your net income by thousands of dollars annually. According to the Tax Foundation, nine states have no state income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Several additional states fully exempt federal pension income, including Illinois, Mississippi, and Pennsylvania.

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Other states tax federal retirement income but provide partial exclusions for pensions, retirees age 65 and older, or income below certain thresholds. According to the Social Security Administration, the majority of states don't tax Social Security benefits, though a small number still do in limited circumstances.

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Because state rules change frequently, retirees considering relocation should verify current treatment with the destination state's department of revenue before making a move. A state with no income tax but high property and sales taxes may not be the bargain it first appears.

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Tax Withholding from Your FERS Annuity

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OPM, the U.S. Office of Personnel Management, withholds federal income tax from each monthly FERS annuity payment based on your election on Form W-4P. You can adjust withholding at any time through the OPM Services Online portal.

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Insufficient withholding across all income sources, including annuity, TSP, and Social Security combined, can trigger an underpayment penalty.

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The IRS requires retirees to either pay 90% of the current year's tax liability or 100% of the prior year's liability (110% for higher earners). You can do this through a combination of withholding and quarterly estimated payments. Many new retirees underwithhold in their first year because the tax software they used while working didn't account for combined retirement income streams.

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Planning Ahead for Federal Retirement Tax 2026

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The combined effect of FERS annuity, TSP withdrawals, the FERS Annuity Supplement, and Social Security can move some retirees into a higher federal tax bracket in a single calendar year. Modeling that combined income stream, including state tax, RMD timing, and the taxable portion of Social Security, is the foundation of a tax-efficient federal retirement plan in 2026.

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Federal Pension Advisors, a retirement planning firm specializing in federal employee benefits, helps FERS employees project after-tax retirement income, evaluate Roth conversion windows, and coordinate withdrawal sequencing across the TSP, Social Security, and the FERS annuity. To discuss your projected tax picture before submitting your retirement application to OPM, schedule a complimentary federal retirement review.

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Frequently Asked Questions

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1. How is my FERS pension taxed in retirement?

The IRS taxes your FERS pension as ordinary federal income. A small portion of each monthly payment is excluded as a tax-free recovery of your after-tax contributions under the IRS Simplified Method. According to the Internal Revenue Service, the excluded amount is calculated using your total contributions divided by an age-based expected return factor. To project your monthly amount, calculate your FERS pension using the high-3 formula.

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2. Do I have to pay taxes on my TSP withdrawals?

Yes. The IRS taxes traditional TSP withdrawals as ordinary federal income in the year received, and state tax treatment depends on where you live. Qualified Roth TSP distributions are federally tax-free when the five-year rule and the age, disability, or death requirements are met. According to the Thrift Savings Plan, eligible rollover distributions paid directly to the participant are generally subject to 20% federal withholding.

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3. Is the FERS Annuity Supplement taxable?

The FERS Annuity Supplement is fully taxable as ordinary federal income. No portion is tax-free. According to OPM, the U.S. Office of Personnel Management, the supplement is also subject to the Social Security earnings test, which reduces the supplement by $1 for every $2 of wages or self-employment income above the annual exempt amount before age 62.

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4. How much of my Social Security will be taxed when I retire?

Up to 85% of your Social Security benefits may be federally taxable depending on your combined income. According to the Social Security Administration, single filers with combined income above $34,000, or joint filers above $44,000, face the 85% threshold. Combined income includes your annuity, TSP withdrawals, other income, and half of your Social Security.

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5. When do I have to start taking RMDs from my TSP?

Under the SECURE 2.0 Act, Required Minimum Distributions from a traditional TSP must begin at age 73 if you were born between 1951 and 1959, or age 75 if born in 1960 or later. According to the Thrift Savings Plan, Roth TSP balances aren't subject to lifetime RMDs. According to the Internal Revenue Service, missing a required RMD triggers a 25% excise tax, reduced to 10% if timely corrected.

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6. Can I avoid paying federal income tax on my FERS retirement?

You can't fully avoid federal income tax on a FERS retirement, but you can reduce it. The main levers are Roth TSP contributions during your career, partial Roth conversions in low-income years, careful timing of Social Security, and residency in a state with no income tax. Federal Pension Advisors, a retirement planning firm specializing in federal employee benefits, recommends modeling at least three withdrawal scenarios before retiring.

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