Best States for Federal Retirees Taxes: Where Your Pension Goes Furthest

Why State Taxes Matter More Than Most Federal Retirees Realize

Your federal pension, TSP distributions, and Social Security benefits are all subject to federal income tax — that part is uniform. What varies dramatically is how your state of residence treats each of these income streams. Some states exempt federal pensions entirely. Others tax them as ordinary income. A handful treat FERS and CSRS pensions differently. And state treatment of TSP withdrawals often diverges from how the same state handles pension income.

A married federal retiree collecting $45,000 in annuity income, $20,000 from the TSP, and $24,000 in Social Security could owe anywhere from $0 to over $4,000 in state income tax depending on where they live. Over a 25-year retirement, that difference compounds to six figures.

States With No Broad Individual Income Tax

The simplest path to zero state income tax on retirement income: live in a state that doesn't have a broad one.

Nine states have no broad individual income tax: Alaska, Florida, Nevada, New Hampshire (interest and dividends only — no tax on pensions, wages, or TSP), South Dakota, Tennessee, Texas, Washington, and Wyoming.

These states do not impose state income tax on your FERS or CSRS annuity, TSP distributions, Social Security, or part-time wages. The tradeoff is typically higher property taxes or sales taxes, so total tax burden requires a broader calculation. But for retirees whose income is almost entirely from federal retirement sources, the savings are straightforward.

States That Fully Exempt Federal Pensions

Several states with income taxes still provide a complete exemption for federal government pensions:

New York offers the broadest carve-out. All pension income from federal, state, and local government retirement systems is fully exempt from New York state income tax — no cap, no income limit. A FERS retiree collecting $60,000 annually pays zero New York tax on that pension. Social Security is exempt in NY, and distributions from the federal TSP are also exempt. If TSP funds are rolled into a commercial IRA, only the principal rollover contribution remains exempt; later IRA earnings do not retain that exemption, though they may qualify for New York's standard $20,000 pension exclusion for retirees age 59½ or older.

Illinois exempts all retirement income from state tax — federal pensions, Social Security, TSP distributions, and IRA withdrawals alike. This makes it one of the most retirement-friendly states for federal employees despite having a flat 4.95% income tax on other earnings.

Mississippi exempts all qualified retirement income, including federal pensions and Social Security benefits, from state income tax.

Pennsylvania doesn't tax any retirement income for residents who've reached retirement eligibility, including federal pensions and TSP distributions.

States With Partial Exemptions Worth Understanding

These states don't fully exempt federal pensions, but their partial exemptions can still save thousands annually:

Maryland Pension Exclusion

Maryland's maximum pension exclusion is $41,200 for tax year 2025 and $40,600 for tax year 2026 for qualifying retirees aged 65 or older or those who are totally disabled. It is restricted to eligible defined benefit and defined contribution plans. Traditional IRAs, Roth IRAs, simplified employee pensions (SEPs), and Keogh plans do not qualify, so a TSP rollover to a commercial IRA loses eligibility for this exclusion.

North Carolina and the Bailey Settlement

North Carolina's treatment of federal pensions hinges on when you were vested in the retirement system. Under the 1998 Bailey v. State of North Carolina settlement, any retiree who had five or more years of creditable service as of August 12, 1989, receives a full state income tax exemption on their federal pension. This applies to both FERS and CSRS pensions.

If you were vested before that date, your entire OPM annuity is exempt from NC state income tax. If you weren't — meaning you entered federal service after the mid-1980s and didn't have five years in by 1989 — your pension is fully taxable in North Carolina. There's no partial credit. It's all-or-nothing based on the vesting date.

For most current retirees (those who entered service in the early-to-mid 1980s or earlier), the Bailey exemption applies. For younger retirees who started their federal careers in the 1990s or later, North Carolina taxes their pension like any other income.

Wisconsin Federal Pension Exemption

Wisconsin exempts FERS basic annuities from state income tax because FERS is integrated with Social Security, which Wisconsin does not tax. Senate Bill 281 extended the full state income tax exemption to all CSRS pension payments for tax years beginning after 2023, removing the former distinction for legacy CSRS pensions.

Virginia Military Retirement Tax Treatment

Virginia does not fully exempt civilian federal pensions. It provides an age deduction of up to $12,000 per person for residents age 65 or older, subject to income-based phase-outs, and a military retirement income subtraction of up to $40,000. FERS and CSRS pensions remain state-taxable under the standard rates.

If you're a federal civilian retiree who also receives military retired pay, only the military portion qualifies for Virginia's military subtraction. Your FERS annuity remains state-taxable.

How States Treat TSP Distributions and Social Security

Pension exemptions get the most attention, but don't ignore how your state treats the other two legs of the retirement stool:

Social Security: State treatment varies and changes with state law. Examples of states with state-level Social Security tax rules or partial exemptions include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

TSP distributions: Most states that tax income treat TSP distributions as ordinary income, even if they exempt pension income. New York, for example, exempts your FERS pension and federal TSP distributions. If those funds are rolled into a commercial IRA, only the principal rollover contribution remains exempt; later IRA earnings do not retain that exemption, though they may qualify for New York's standard $20,000 pension exclusion for retirees age 59½ or older. Illinois is the notable exception — it exempts all retirement income, TSP included. Pennsylvania also exempts TSP distributions for eligible retirees.

This distinction means a New York retiree should check whether a proposed TSP rollover changes the state treatment of later distributions; the federal TSP's own distributions are exempt.

Making the Comparison Practical

State tax savings alone shouldn't drive a relocation decision, but for retirees already considering a move, the numbers are worth running. Our Federal Retirement Tax toolkit includes a State Tax Treatment Worksheet that maps your specific income streams — OPM annuity, TSP distributions, Social Security, and part-time wages — against your current and prospective states' tax rules, so you can compare after-tax retirement income side by side.

For retirees staying put, the same worksheet helps identify which income streams to draw from first. In a state that exempts pensions but taxes TSP distributions, delaying TSP withdrawals (and leaning harder on the pension) can meaningfully reduce your cumulative state tax bill over the first decade of retirement.