Tax Planning for Federal Retirees 2026: What Changed and What to Do About It

Last Updated: January 21, 2026 Reading Time: 12 min

Federal retirees face a unique tax challenge that most Americans don't: multiple income streams that stack together and push you into higher brackets. Your FERS pension, TSP withdrawals, and Social Security all hit at once, and the IRS doesn't give you a break for planning well.

The good news? 2026 brings some opportunities. A new $6,000 senior deduction, TSP Roth in-plan conversions launching January 28, and strategies that can save you tens of thousands over your retirement. The bad news? Social Security taxation thresholds haven't changed since 1984, and IRMAA can cost you over $1,000 per year if you're just $1 over the threshold.

This guide covers exactly how each income source is taxed, what changed for 2026, and the strategies that actually work for federal retirees.

Key Takeaways

• FERS pension is ~95% taxable at the federal level; only your prior after-tax contributions are exempt
• FERS Supplement is 100% taxable, unlike Social Security (no contribution recovery)
• New $6,000 senior deduction for ages 65+ with MAGI under $75k/$150k (expires 2028)
• RMDs start at 73 (or 75 if born 1960+); Roth TSP now exempt from RMDs
• IRMAA cliff effect: Going $1 over $109,000 costs ~$974/year in Medicare surcharges
• 9 states have no income tax; 16 states exempt federal pensions entirely

How Each Federal Income Source Is Taxed

Understanding how each piece of your retirement income is taxed is the foundation of smart planning.

FERS Pension: ~95% Taxable

Your FERS annuity is mostly taxable as ordinary income. The small tax-free portion represents your prior after-tax contributions, recovered over your life expectancy.

Component	Tax Treatment
Monthly annuity	~95% taxable as ordinary income
Tax-free portion	Your prior contributions ÷ life expectancy months
Form you receive	1099-R from OPM (Box 2a shows taxable amount)

The IRS uses the Simplified Method: divide your total after-tax contributions by expected payments based on your retirement age. For a retiree at 62, approximately 360 months are used. Only a small fraction of each payment is tax-free.

FERS Supplement: 100% Taxable

Here's what catches many early retirees off guard: the FERS Supplement is 100% taxable.

Component	Tax Treatment
Monthly supplement	100% taxable as ordinary income
Earnings test	Reduced $1 for every $2 earned above $23,400
Duration	Paid until the month you turn 62

Critical difference from Social Security: The FERS Supplement has no "return of contribution" component. Every dollar is taxable. Meanwhile, actual Social Security is only up to 85% taxable depending on your income.

TSP Withdrawals: Depends on Account Type

Account Type	Tax Treatment
Traditional TSP	100% taxable as ordinary income
Roth TSP (qualified)	100% tax-free
Roth TSP (unqualified)	Contributions tax-free; earnings taxable + 10% penalty

Qualified Roth: You must be 59 1/2 or older AND it must be at least 5 years since your first Roth TSP contribution.

Age 55 exception: If you separate from federal service at 55 or older, you can withdraw from TSP without the 10% early withdrawal penalty. This does NOT apply if you roll to an IRA.

Social Security: Up to 85% Taxable

Social Security taxation thresholds haven't changed since 1984. That means more retirees get taxed every year.

Combined Income (Single)	Taxable Portion
Under $25,000	0% taxable
$25,000 - $34,000	Up to 50% taxable
Over $34,000	Up to 85% taxable

Combined Income (MFJ)	Taxable Portion
Under $32,000	0% taxable
$32,000 - $44,000	Up to 50% taxable
Over $44,000	Up to 85% taxable

Combined income formula: AGI + tax-exempt interest + 1/2 of Social Security benefits

Reality for federal retirees: Most FERS retirees with a pension, TSP, and Social Security will have combined income well above these thresholds. That means 85% of your Social Security is taxable.

The $6,000 Senior Deduction: New for 2025-2028

The One Big Beautiful Bill Act added a temporary deduction for taxpayers 65 and older. This is on top of the standard deduction.

Eligibility Requirements

Requirement	Details
Age	65 or older by December 31
Filing status	Single, HOH, MFJ, or surviving spouse (NOT married filing separately)
Income limit	Phases out above $75,000 (single) / $150,000 (MFJ)
Phase-out rate	Reduced $0.06 for every $1 over threshold

How It Affects Federal Retirees

Scenario	Deduction Amount
Single retiree, $60,000 MAGI	Full $6,000
Single retiree, $80,000 MAGI	$5,700 (reduced by $300)
MFJ couple, $175,000 MAGI	$4,500 (reduced by $1,500)
MFJ couple, $250,000 MAGI	$0 (fully phased out)

Planning opportunity: Reducing your MAGI through TSP contributions, Roth conversions in earlier years, or deferring income can maximize this deduction.

Sunset warning: This deduction expires after 2028 unless Congress extends it.

IRMAA: The Hidden Tax on Federal Retirees

Federal retirees are uniquely vulnerable to IRMAA (Income-Related Monthly Adjustment Amount) because your multiple income streams stack together. The higher your career salary, the more IRMAA matters—use our GS Pay Calculator to understand how your current grade and locality affect your future MAGI.

2026 IRMAA Brackets (Based on 2024 Income)

Single MAGI	MFJ MAGI	Part B Premium	Part D Surcharge
Up to $109,000	Up to $218,000	$202.90	$0
$109,001-$137,000	$218,001-$274,000	$284.10	$14.50
$137,001-$171,000	$274,001-$342,000	$405.80	$37.50
$171,001-$205,000	$342,001-$410,000	$527.50	$60.40
$205,001-$499,999	$410,001-$749,999	$649.20	$83.30
$500,000+	$750,000+	$689.90	$91.00

The Cliff Effect

Unlike tax brackets, IRMAA applies the FULL surcharge when you exceed a threshold by even $1. A $110,000 MAGI pays the same surcharge as $136,999.

Federal retiree example:

• FERS pension: $50,000
• Social Security: $30,000
• TSP RMD: $35,000
• Total MAGI: $115,000 (above first threshold)
• Result: $81.20/month surcharge = $974.40/year in extra Medicare costs

One-time events like a large Roth conversion, home sale, or TSP withdrawal can spike your MAGI and trigger IRMAA surcharges two years later. Plan accordingly.

State Tax Considerations

Where you live dramatically affects your retirement taxes.

States With No Income Tax (9 States)

State	Notes
Alaska	No income tax, no sales tax, no estate tax
Florida	No income tax, moderate property taxes
Nevada	No income tax, higher sales tax
New Hampshire	Dividend tax repealed 2025, no sales tax
South Dakota	No income tax, no estate tax
Tennessee	Hall tax repealed 2021
Texas	No income tax, higher property taxes
Washington	No income tax, higher sales tax
Wyoming	No income tax, lowest combined sales tax (5.44%)

States That Exempt Federal Pensions (7 Additional States)

State	Notes
Illinois	Pensions, IRAs, 401k exempt; 4.95% flat tax on other income
Pennsylvania	Pensions, IRAs, Social Security exempt; 3.07% flat tax
Mississippi	Pensions exempt (except early retirement)
Alabama	Federal pensions exempt
Hawaii	Federal pensions exempt
Iowa	Federal pensions exempt for age 55+
Kansas	Social Security exempt; federal pensions partially exempt

States That Still Tax Social Security (8 States in 2026)

Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont

West Virginia begins phasing out Social Security taxation in 2026.

Tax-Efficient Withdrawal Strategies

The "Stacking" Problem

Federal retirees face a unique challenge: FERS pension + Social Security + TSP RMDs all hit at once after age 73, pushing you into higher brackets.

Strategy 1: Early Retirement Roth Conversions (Ages 55-72)

The years between retirement and RMDs are often your lowest-income years. Use this window to convert Traditional TSP to Roth.

Tax Bracket	2026 Single Income	Conversion Strategy
10%	$0 - $12,600	Fill bracket with conversions
12%	$12,601 - $51,150	Sweet spot for Roth conversions
22%	$51,151 - $90,850	Still attractive for many
24%	$90,851 - $195,200	Consider if RMDs will push higher

Example: A 58-year-old retiree with $30,000 FERS pension could convert $20,000 Traditional TSP to Roth, pay 12% tax now ($2,400), and have tax-free growth and withdrawals later.

New for 2026: TSP Roth in-plan conversions launch January 28, 2026. You can now convert Traditional TSP to Roth TSP directly within your account (minimum $500, max 26 conversions per year).

Strategy 2: Delay Social Security to Reduce "Triple Stack"

Claiming Age	Benefit Level	Tax Impact
62	70% of full benefit	Adds to taxable income 5+ years longer
67 (FRA)	100% of full benefit	Balanced approach
70	124% of full benefit	8% guaranteed return + delayed taxation

Federal retiree advantage: Your FERS pension and TSP can cover expenses while Social Security grows 8% per year from FRA to 70.

Strategy 3: Roth TSP for Tax-Free Income

Benefits of Roth TSP withdrawals:

• Don't count toward IRMAA calculations
• Don't increase Social Security taxation
• No RMDs on Roth TSP (SECURE 2.0)
• Provide tax diversification in retirement

Strategy 4: Income Smoothing

Avoid lumpy income years that trigger IRMAA or push you into higher brackets:

• Spread large Roth conversions across multiple years
• Time capital gains realizations carefully
• Coordinate TSP withdrawals with other income sources
• Consider QCDs (Qualified Charitable Distributions) after 70 1/2

Model Your Retirement Taxes

Use the FERS Retirement Calculator to estimate your pension and see how it fits into your total retirement income. Then use the TSP Calculator to model withdrawal scenarios and Roth conversion strategies.

Planning ahead can save you tens of thousands in taxes over your retirement. The key is understanding how your income sources interact.

7 Common Tax Mistakes Federal Retirees Make

1. Taking Social Security Too Early

Problem: Claiming at 62 while still receiving FERS pension and taking TSP withdrawals creates unnecessary income stacking.

Solution: Delay Social Security to 70 if possible. Use TSP to bridge the gap.

2. Ignoring the FERS Supplement Earnings Test

Problem: Part-time work while receiving FERS Supplement can reduce or eliminate it.

2026 limit: Approximately $23,400. For every $2 earned above this, your supplement is reduced by $1.

Solution: Track earnings carefully or consider delaying additional work until after 62.

3. Not Planning for RMDs

Problem: At 73, RMDs begin whether you need the money or not. Large Traditional TSP balances create large RMDs.

Solution: Partial Roth conversions before 73 to reduce your Traditional balance.

4. Overlooking IRMAA

Problem: One-time events (Roth conversion, home sale, large TSP withdrawal) spike MAGI and trigger IRMAA surcharges 2 years later.

Solution: Plan income smoothing. Be aware of bracket cliffs.

5. Not Adjusting Withholding

Problem: FERS pension withholding is often insufficient. Retirees face surprise tax bills.

Solution: Review Form W-4P quarterly. Consider increasing TSP withholding to compensate.

6. Rolling TSP to IRA Before 59 1/2

Problem: Rolling TSP to IRA loses the age 55 penalty-free withdrawal exception.

Age 55 rule: If you separate from federal service at 55+, you can withdraw from TSP without the 10% penalty. IRAs require 59 1/2.

Solution: Keep money in TSP until at least 59 1/2 if you might need early access.

7. Moving to a High-Tax State

Problem: Retirees move for lifestyle without considering state tax impact.

Solution: Model your total tax burden (income + property + sales) before relocating.

Important Dates for 2026

Date	Event
January 28, 2026	TSP Roth in-plan conversions begin
January 31, 2026	TSP mails 1099-R forms for 2025 distributions
April 15, 2026	Tax filing deadline
December 31, 2026	Annual RMD deadline
December 31, 2028	$6,000 senior deduction expires (unless extended)

Frequently Asked Questions

Is my FERS pension taxable?

Yes, approximately 95% of your FERS pension is taxable as ordinary income at the federal level. The small tax-free portion represents your prior after-tax contributions, recovered over your life expectancy using the IRS Simplified Method. State taxation varies, with 16 states fully exempting federal pensions.

How is the FERS Supplement taxed differently than Social Security?

The FERS Supplement is 100% taxable as ordinary income, unlike Social Security where only up to 85% may be taxed depending on your combined income. This means every dollar of FERS Supplement adds to your taxable income until you turn 62.

What are the Social Security taxation thresholds for 2026?

For single filers, up to 50% of benefits are taxable if combined income is $25,000-$34,000, and up to 85% taxable above $34,000. For married filing jointly, the thresholds are $32,000-$44,000 (50%) and above $44,000 (85%). These thresholds have not changed since 1984, meaning more retirees get taxed every year due to inflation.

When do I have to start taking Required Minimum Distributions?

If you were born 1951-1959, RMDs begin at age 73. If born 1960 or later, RMDs begin at age 75. You can delay your first RMD until April 1 of the year after you turn the RMD age, but this means taking two RMDs in one year, which could spike your taxes. Under SECURE 2.0, Roth TSP accounts are no longer subject to RMDs.

What is the $6,000 senior deduction and do I qualify?

The One Big Beautiful Bill Act (2025) created a temporary $6,000 deduction for taxpayers 65 and older with MAGI below $75,000 (single) or $150,000 (MFJ). It phases out at $0.06 per dollar above those limits and expires after 2028. The deduction is in addition to the standard deduction.

What states are most tax-friendly for federal retirees?

Nine states have no income tax (FL, TX, NV, WA, WY, TN, SD, AK, NH). Beyond those, Pennsylvania, Illinois, and Mississippi exempt federal pensions entirely while having income taxes on other income. For 2026, 41 states do not tax Social Security benefits.

How can I avoid Medicare IRMAA surcharges?

IRMAA is based on your income from 2 years prior. For 2026 premiums, your 2024 MAGI matters. If it exceeded $109,000 (single) or $218,000 (MFJ), you'll pay higher Part B and Part D premiums. Strategies include Roth conversions before 73 (reduces future RMDs), tax-loss harvesting, and income smoothing to stay below bracket cliffs.

Related Resources

• TSP Withdrawal Guide 2026: Complete guide to TSP withdrawals, Rule of 55, and timing
• TSP Roth In-Plan Conversion Guide: How the new conversion option works
• FERS Retirement Calculator: Estimate your pension and total retirement income
• TSP Calculator: Model withdrawal scenarios and conversion strategies

Sources

• IRS Publication 721: Tax Guide to U.S. Civil Service Retirement Benefits
• IRS One Big Beautiful Bill Act: Tax deductions for seniors
• SSA Provisions Affecting Taxation of Benefits
• IRS RMD FAQs
• OPM FERS Annuity Supplement FAQ
• Federal Pension Advisors: 2026 IRMAA Brackets
• Kiplinger: States That Don't Tax Pension Income