Best States to Retire for Federal Employees 2026

Last Updated: March 31, 2026 Reading Time: 10 min

Where you retire matters more than most federal employees realize. The difference between a high-tax state and a zero-tax state can save you $5,000 to $15,000 per year on a typical FERS income.

The analysis is more complicated than looking up income tax rates, though. Your FERS pension, TSP withdrawals, and Social Security are each taxed differently by every state. A state that looks tax-friendly at first glance might quietly tax your TSP distributions while leaving your pension alone.

This guide covers how each state treats all three income streams, which states are good for federal retirees, and where the tradeoffs are.

Key Takeaways

• Twelve states exempt your FERS pension, TSP withdrawals, and Social Security all at once: AK, FL, IL, MS, NV, NH, PA, SD, TN, TX, WA, WY.
• Alabama and Hawaii exempt your federal pension but still tax TSP withdrawals. This catches a lot of retirees off guard.
• As of 2026, only 8 states tax Social Security benefits. West Virginia completed its phase-out, so 41 states plus DC now leave Social Security fully alone at the state level.
• No-income-tax states are not automatically the cheapest. Florida's homeowners insurance ($5,600/year average) and Texas's property taxes (1.47%) can offset income tax savings entirely.
• FEHB follows you anywhere in retirement if you're enrolled in a national plan. Local HMOs do not.

Why State Tax Law Matters for Federal Retirees

Most private-sector workers have one income stream in retirement: a 401(k). You have three.

Your FERS pension, TSP withdrawals, and Social Security are all taxable at the federal level. Each state can also tax them, and the rules for each stream are often completely different within the same state.

On a combined retirement income of $80,000 (a modest estimate for a mid-career federal retiree), the difference between living in Virginia and living in Pennsylvania could mean paying $4,000 or more in state income taxes each year. Over a 25-year retirement, that's $100,000 or more.

This is where most general retirement guides fall short. They check whether a state taxes "pensions" but don't separate TSP from the pension, and don't flag that Social Security is treated differently still. Federal retirees need all three numbers.

States That Don't Tax Federal Pensions

Sixteen states fully exempt federal government pensions from state income tax in 2026.

Nine of these have no state income tax at all, so the pension exemption is automatic: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Seven others have a state income tax but specifically exempt retirement income: Illinois, Mississippi, and Pennsylvania exempt pensions, TSP distributions, and Social Security entirely. Iowa exempts all three for residents age 55 and older (a new provision effective in 2025, with the state's flat tax rate dropping to 3.9% in 2026). Alabama and Hawaii exempt federal pensions only. New York exempts all government pensions (state, local, federal, and military) but still taxes TSP distributions as regular income.

State	FERS/CSRS Pension	TSP Withdrawals	Social Security	Notes
Alaska	Exempt	Exempt	Exempt	No income tax
Florida	Exempt	Exempt	Exempt	No income tax; high insurance costs
Nevada	Exempt	Exempt	Exempt	No income tax
South Dakota	Exempt	Exempt	Exempt	No income tax; cold winters
Tennessee	Exempt	Exempt	Exempt	No income tax; ~10% below avg COL
Texas	Exempt	Exempt	Exempt	No income tax; high property taxes
Washington	Exempt	Exempt	Exempt	No income tax; high COL in western WA
Wyoming	Exempt	Exempt	Exempt	No income tax; lowest property taxes
New Hampshire	Exempt	Exempt	Exempt	Dividend/interest tax fully phased out 2025
Illinois	Exempt	Exempt	Exempt	4.95% flat tax on other income; retirement exempt
Mississippi	Exempt	Exempt	Exempt	Lowest cost of living in the US (COL index: 83.3)
Pennsylvania	Exempt	Exempt	Exempt	No tax on qualified retirement distributions
Iowa	Exempt (age 55+)	Exempt (age 55+)	Exempt (age 55+)	3.9% flat rate from 2026; full exemption at 55
Alabama	Exempt	Taxable (2%-5%)	Exempt	TSP is taxed; common trap for retirees
Hawaii	Exempt	Taxable (up to 11%)	Exempt	TSP taxable; very high cost of living
New York	Exempt (govt pensions)	Taxable	Exempt	All govt pensions exempt; TSP still taxed

States That Don't Tax Social Security

This one is easier than the pension question. As of 2026, only 8 states tax Social Security in any form: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.

West Virginia completed its phase-out of Social Security taxation. Starting with tax year 2026 (returns filed in 2027), Social Security benefits are fully exempt there.

That leaves 41 states plus DC with zero state tax on Social Security. Most states figured out a long time ago that taxing a federal benefit that was already taxed at the federal level is politically unpopular.

The federal government still taxes up to 85% of your Social Security depending on your combined income, and that applies regardless of where you live.

No Income Tax States: The Full Picture

Nine states have no state income tax whatsoever, making them automatic winners for federal retirees on the income side. But they're not all equal.

Wyoming is the best pure tax deal. No income tax, the lowest combined property tax rate among no-income-tax states (0.55% average), and a modest cost of living. The catch: it's rural, winters are severe, and medical specialists are limited.

Tennessee offers no income tax, a cost of living roughly 10% below the national average, and growing retirement communities in Chattanooga and Knoxville. Property tax rates are moderate at 0.60% average.

South Dakota has no income tax and low property taxes (1.03% average), but a cold climate and limited healthcare infrastructure in most of the state.

Texas gets the most attention and is legitimately tax-friendly on income. But property taxes average 1.47%. On a $330,000 home, that's $4,851 per year before exemptions. Texas homeowners over 65 now receive a combined $200,000 exemption from school district property taxes (updated in 2025), which reduces the effective burden significantly for older retirees. Housing costs have also climbed 30% since 2020.

Florida is the most popular destination for federal retirees. No income tax, a large VA hospital network, and a lot of retirement infrastructure built out over decades. The real problem is homeowners insurance, which averages over $5,600 per year, the highest in the nation. For a retiree saving $2,200 per year in state income taxes on a $50,000 pension, the insurance cost alone can more than cancel out the tax benefit. Flood insurance adds more in many coastal areas.

Nevada has no income tax and property tax rates are low (0.44% average). Las Vegas has solid healthcare access. Cost of living is slightly above the national average, driven by housing.

Alaska has no income tax, no state sales tax, and pays residents through the Permanent Fund Dividend. Healthcare access in rural areas is limited, and the cost of living is high outside of Anchorage.

Washington has no income tax but is one of the more expensive states overall, especially in the Seattle metro area. Eastern Washington is more affordable and still tax-free.

New Hampshire completed its phase-out of the dividend and interest tax in 2025, making it fully income-tax-free. No sales tax either. Property taxes are the tradeoff: they're high in much of the state. But the New England lifestyle, proximity to Boston healthcare, and access to good medical centers make it attractive for federal retirees coming from the Northeast.

Best States by Total Tax Burden

The right comparison adds state income tax, property tax, and sales tax together and adjusts for a typical federal retiree's spending. Here is how the top states compare.

Mississippi is the strongest combination of low taxes and low cost of living. The state has a flat income tax rate but exempts all retirement income. The cost of living index is 83.3 (national average = 100), the lowest in the country. The median home price is around $140,000. Property taxes average 0.48%. A federal retiree's pension and TSP go further here than almost anywhere else in the country.

Alabama is a close second if your retirement income is mostly pension (not TSP). No income tax on your FERS pension, property taxes average just 0.36% (the lowest in the nation), and the cost of living index is 87.9. The catch: TSP withdrawals are taxed at 2%-5%, so heavy TSP reliance changes the math.

Tennessee has no income tax on any income, a COL roughly 10% below the national average, a warm climate, and decent healthcare in the metro areas.

Pennsylvania is the best option for retirees staying in the Mid-Atlantic region. A 3.07% flat tax rate applies to wages, but all qualified retirement income, including your FERS pension, TSP distributions, and Social Security, is fully exempt. If you're near the Maryland or DC area, retiring to Pennsylvania means essentially zero state income tax on your federal retirement income. Property taxes are higher in suburban Philadelphia and Pittsburgh, but rural and small-city areas in PA are quite affordable.

States to Avoid for Federal Retirees

Virginia is the one DC-area federal employees most often get wrong. Virginia has no special exemption for civilian federal pensions. Your FERS or CSRS annuity is taxed as ordinary income. The military retirement deduction (up to $40,000 from 2025) does not apply to civilian federal service. Many long-career federal employees in Northern Virginia assume they'll retire in place, then discover they'd save $2,000-$5,000 per year by moving one state north to Pennsylvania.

California has no pension exemption for federal retirees and a top marginal rate of 13.3%. TSP distributions are fully taxable. The cost of living is among the highest in the nation. For federal retirees with significant TSP balances, California is one of the most expensive places to retire.

Minnesota taxes FERS pensions, TSP distributions, and Social Security above income thresholds. For a retiree with $80,000 in combined income, that's real money out the door every year.

The Alabama and Hawaii trap deserves its own callout. Both states are commonly listed as "federal pension-friendly" because they exempt your FERS/CSRS annuity. That's true. But both states fully tax your TSP withdrawals as ordinary income. Alabama applies 2%-5%; Hawaii applies up to 11%. If your TSP is a major part of your retirement income, these states are not as favorable as they appear.

The North Carolina Bailey exemption is real but often misunderstood. If you had five or more years of creditable federal service by August 12, 1989, your FERS or CSRS pension is fully exempt from NC income tax for life. Your TSP withdrawals, however, are not covered by the Bailey settlement and are taxed at standard NC rates. Federal retirees who don't qualify for Bailey pay ordinary income tax on both their pension and TSP in North Carolina.

Cost of Living vs Tax Savings

Income tax is only part of the picture. Housing costs, insurance, and property taxes determine what your money actually buys.

State	COL Index	Median Home Price	Property Tax Rate	Key Tradeoff
Mississippi	83.3	~$141,000	0.48%	Most affordable; limited urban centers
Alabama	87.9	~$170,000	0.36%	Very affordable; TSP taxable
Tennessee	~89	~$280,000	0.60%	Warm, affordable; metro areas rising
South Carolina	~92	~$280,000	0.47%	Military-friendly; partial pension exemption
Georgia	~93	~$290,000	0.80%	SS exempt; $65K exclusion at 65; Atlanta is expensive
North Carolina	~94	~$310,000	0.73%	Bailey exemption key; otherwise fully taxable
South Dakota	~94	~$285,000	1.03%	No income tax; cold; limited healthcare
Texas	~95	~$330,000	1.47%	No income tax; high property taxes
Pennsylvania	~99	~$240,000	1.36%	All retirement income exempt; high metro property taxes
Florida	~103	~$380,000	0.71%	No income tax; high insurance costs
Wyoming	~96	~$310,000	0.55%	Best tax deal; rural; limited specialists
Nevada	~101	~$400,000	0.44%	No income tax; Las Vegas solid healthcare
Hawaii	193.3	~$730,000	0.26%	Pension exempt; TSP taxable; nearly double average COL

Say you have a $40,000 FERS pension, $20,000 in TSP distributions, and $18,000 in Social Security annually, for $78,000 total. If you retire in Virginia, you'd owe roughly $4,000-$4,500 in state income tax on that income. If you retire in Pennsylvania, you owe zero. That's $4,000 a year back in your pocket, every year, just from where you live.

If you move to Florida instead, your income tax savings are similar to Pennsylvania, but if you're buying a $350,000 home with average insurance costs, you're paying $5,600 or more per year in homeowners insurance alone. That trade depends on your priorities, not just the tax rate.

Partial-Credit States Worth Knowing

Some states don't make the top tier but have specific exemptions worth knowing about, especially if you're 65 or older.

Georgia exempts Social Security at all ages and allows retirees age 65 and older to exclude up to $65,000 in retirement income from state taxes (at a flat 5.39% rate). On a $65,000 retirement income, a Georgia retiree 65+ could owe very little in state taxes. In 2026, the military retirement exclusion in Georgia has no age requirement, though the general $65,000 limit still applies across all retirement income types.

South Carolina offers a retirement income deduction of up to $10,000 for residents age 65 and older, plus a $15,000 age deduction that can be stacked. Military retirement is fully exempt. Cost of living is affordable, and the coastal and mountain areas have a well-established retirement community infrastructure.

Maryland offers a partial exemption of up to $33,100 for retirees age 65 and older. It's not a full exemption. And the DC suburbs in Maryland are expensive. The deduction matters more for retirees in Frederick or western Maryland than for those in Montgomery County.

Michigan allows a pension deduction of up to $67,610 for single filers and $135,220 for joint filers in 2026. This cap applies across all pension and retirement sources combined, so your FERS pension, IRA, and TSP distributions all compete for the same deduction bucket.

How to Compare States for Your Situation

Your specific income mix determines which state works for you. Run through these eight steps.

1. Estimate your three income streams. Use the FERS Retirement Calculator for your pension, add your projected TSP distributions, and pull your Social Security estimate from ssa.gov/myaccount.

2. Check what each candidate state actually taxes. Use the tables in this guide. Look at TSP treatment separately from the pension, because they're often different.

3. Calculate state income tax for each scenario. For states with partial exemptions, apply the caps. For flat-rate states, multiply the taxable amount by the rate.

4. Add property tax. Look up the effective rate for the specific county or city you're considering, not just the statewide average. Rates vary sharply within states.

5. Get real insurance quotes. Homeowners insurance in Florida and along the Gulf Coast runs two to three times what you'd pay inland. Get actual quotes for the area, not state averages.

6. Verify your FEHB plan covers the area. If you're in a regional HMO, check whether it covers your intended retirement location. If it doesn't, switch to BCBS FEP or GEHA during Open Season before you retire.

7. Check healthcare access. Wyoming and rural South Dakota are tax-friendly but have limited specialists and no major research hospitals nearby. If you have ongoing health issues, proximity to a good medical center belongs in the calculation.

8. Factor in family. A $3,000 tax savings doesn't offset being 2,000 miles from grandchildren. Tax is one number in a bigger decision.

A Note on Changing Your Tax Domicile

If you move to escape a high-tax state, you need to actually establish domicile in the new state. Change your driver's license, voter registration, vehicle registration, and the address of record on file with OPM.

California and New York are particularly aggressive about pursuing former residents they believe have not fully severed ties. Keep records showing you intended to make the new state your permanent home. Spending more than half the year in the old state while claiming a new domicile is a common audit trigger.

Calculate Your Numbers

Use our free FERS Retirement Calculator to estimate your pension amount. Plug that number into the state tax rules above to see your true net retirement income by state. The difference can run to hundreds of thousands of dollars over a 20-25 year retirement.

Estimate your FERS pension now

Frequently Asked Questions

Which states don't tax my FERS pension at all?

Twelve states exempt both your FERS/CSRS pension and your TSP withdrawals: Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. Iowa also exempts both income streams if you're age 55 or older, with a flat 3.9% tax rate effective in 2026.

Does my state tax my TSP withdrawals differently from my pension?

Yes, and this distinction trips up a lot of retirees. Alabama and Hawaii both exempt your federal pension from state income tax but still tax TSP distributions as ordinary income. Alabama taxes TSP at 2%-5%; Hawaii taxes it at up to 11%. Pennsylvania and Illinois exempt both. Always research each income stream separately before choosing a retirement state.

Does Virginia or Maryland tax my FERS pension?

Virginia taxes FERS and CSRS pension income with no special civilian pension exemption. The military retirement deduction that Virginia offers does not extend to civilian federal retirees. Maryland offers a partial exclusion of up to $33,100 for retirees age 65 or older under certain conditions. Many DC-area federal retirees relocate to Pennsylvania specifically to avoid state income tax on their pension and TSP.

What is the Bailey exemption in North Carolina?

The Bailey exemption fully exempts your FERS or CSRS pension from North Carolina income tax if you had five or more years of creditable federal service by August 12, 1989. However, your TSP withdrawals are not covered by the Bailey settlement and remain taxable at standard NC rates. Check your service history carefully before assuming you qualify.

Will my FEHB coverage work if I retire to Florida or Texas?

Yes, if you're enrolled in a national plan like BCBS FEP or GEHA. These plans have nationwide networks and cover you in any state. HMO-type plans tied to a geographic service area will not cover routine care if you move out of their service area. If you plan to relocate in retirement, switch to a national FEHB plan during Open Season before you retire.

Is moving to a no-income-tax state always worth it financially?

Not automatically. Texas has no income tax but property taxes average 1.47%. On a $330,000 home, that's $4,851 per year in property taxes. Florida has no income tax but homeowners insurance averages over $5,600 per year, the highest in the nation. Wyoming has excellent tax treatment but limited access to specialists and major medical centers. Always calculate your total cost of living, not just income taxes.

Related Resources

• FERS Retirement Calculator: Estimate your pension and total retirement income
• Tax Planning for Federal Retirees 2026: How FERS pension, TSP, and Social Security are taxed at the federal level
• FERS + Social Security + TSP: Your 3 Retirement Income Streams: How the three legs work together and how much you'll need from each
• First Year Federal Retirement Guide 2026: Month-by-month guide to your first year as a federal retiree
• FEHB Value in Retirement: How FEHB continues in retirement and what it's worth
• FERS Retirement Guide: Full FERS reference guide

Sources

• Kiplinger: 16 States Don't Tax Pension Income in 2026
• Kiplinger: States That Tax Social Security 2026
• Alabama Department of Revenue: Income Exempt from Alabama Income Taxation
• North Carolina DOR: Bailey Decision
• Georgia DOR: Retirement Income Exclusion
• South Carolina DOR: Retirees Tax Tips
• Virginia Tax: Military Benefits FAQ
• SSA.gov: Social Security Fairness Act
• OPM: Healthcare Insurance Open Season Retirees
• Tax Foundation: 2026 State Tax Changes