Federal Retirement Taxes:
The Surprise Most Retirees Don't See ComingYour FERS pension is 100% taxable. Your traditional TSP withdrawals are 100% taxable. Up to 85% of your Social Security may be taxable. And in the year you retire, all of these can stack — creating the highest-income tax year of your life.
Plan My Tax Strategy
"The year you retire can become the highest-income tax year of your life."
Mike StevensThe 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. Strategic timing can save thousands.
Mid-Year Retirement Disaster
A GS-13 couple retiring mid-year can easily stack 6 months of salary, annual leave payout, pension payments, and TSP withdrawals into a single year — totaling $200,000+ in taxable income and pushing them into higher brackets than any working year.
The December 31st Strategy
By retiring December 31st, all pension income, TSP withdrawals, and Social Security benefits are pushed into the following calendar year — a year with zero salary income. Potential one-year savings: $5,000-$15,000.
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 often exceeds what you earned while working — creating the tax surprise most retirees never anticipated.
IRMAA: The Tax on Your Tax.
2026 IRMAA Thresholds
IRMAA surcharges are based on your income from two years prior. At the first tier, Part B jumps to $284.10/month per person. Strategic retirement timing and income management can help you avoid these surcharges entirely.
Roth Conversions for Federal Employees
In-plan Roth conversions are now available 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.
- In-plan TSP Roth conversion available 2026
- Fill lower brackets without triggering IRMAA
- Convert during low-income years before RMDs
- Tax-free withdrawals in retirement
- No RMDs on Roth balances
- Reduce future taxable income
- Mandatory Roth catch-up: $150,000 threshold
- 24% bracket starts at $206,701 (MFJ)
Where You Live
Changes Everything
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-$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. For federal retirees considering relocation, these states offer the most straightforward tax 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. Understanding your state's specific treatment of FERS annuities is essential for accurate retirement income projections.
Relocation Analysis
Moving to a tax-friendly state in retirement could save tens of thousands over your lifetime. We help quantify the real impact so you can make an informed decision — factoring in cost of living, not just tax rates.
Retirement Tax FAQ
Essential information about federal retirement taxation, IRMAA avoidance, Roth conversions, and strategic retirement timing.
Plan My Tax StrategyReady to minimize your retirement tax bill?
Don't let the retirement year tax trap cost you thousands. Schedule a comprehensive tax planning analysis to optimize your retirement timing, Roth conversion strategy, and income management for maximum after-tax retirement income.
Plan My Tax StrategyFederal Employee Specialists
