Federal Pension Tax Rate: How FERS and CSRS Annuities Are Taxed

Yes, Your Federal Pension Is Taxable

Your FERS or CSRS annuity is treated as ordinary income by the IRS and taxed at your marginal federal income tax rate — the same brackets that applied to your wages during your career. There's no special pension tax rate, no flat tax, and no blanket exemption for federal retirement income at the federal level.

The one break you get: a small portion of each monthly payment is tax-free because you made after-tax contributions to the retirement fund during your career. The IRS lets you recover those contributions gradually using the Simplified Method (covered in IRS Publication 721). For most FERS retirees, the tax-free portion is modest — typically $100 to $200 per month — because FERS contribution rates are low (0.8% to 4.4% of pay depending on hire date).

Everything above that exclusion is taxable at whatever bracket your total income puts you in.

What Rate You'll Actually Pay

Federal income tax brackets for 2026:

Most federal retirees land in the 12% or 22% bracket on their annuity alone. But your annuity isn't the only income — add TSP distributions, Social Security, and any part-time earnings, and the combined total determines your effective bracket.

A FERS retiree with a $36,000 annuity (after the Simplified Method exclusion), $22,000 in Social Security (85% taxable = $18,700), and $12,000 in TSP withdrawals has roughly $66,700 in total income before deductions. For a single filer, that puts them solidly in the 22% bracket. For a married couple filing jointly, they'd be in the 12% bracket on that income alone — though a spouse's income would change the picture.

FERS vs. CSRS: Different Contribution Rates, Same Tax Treatment

Both FERS and CSRS annuities are taxed identically at the federal level — as ordinary income minus the Simplified Method exclusion. The difference is in the exclusion size.

CSRS employees contributed 7.0% of pay throughout their careers (or 7.5% for law enforcement and firefighters). Over a 30-year career, that builds a substantial cost basis — often $80,000 to $150,000 — which translates to a larger monthly tax-free exclusion.

FERS employees contributed at much lower rates: 0.8% for those hired before 2013, 3.1% for 2013 hires, and 4.4% for those hired in 2014 or later. A FERS employee hired in 1990 who worked 30 years at an average salary of $65,000 contributed roughly $15,600 to the retirement fund. At the 56–60 age factor of 310, that's a monthly exclusion of about $50 — far less than a comparable CSRS employee's exclusion.

The practical result is that a higher percentage of CSRS annuity income is tax-free in the early years of retirement, though the CSRS cost basis also runs out faster (per dollar) because the exclusion is larger.

State Taxes Add Another Layer

Federal pension taxation is just one piece. Whether your state taxes your annuity is an entirely separate question, and the answers vary dramatically:

• Nine states have no broad individual income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire)
• Several states fully exempt federal pensions (New York, Illinois, Pennsylvania, Mississippi, and others)
• Some states offer partial exclusions with age or income limits (Maryland, Virginia, Georgia, Colorado)
• A few states tax federal pensions like any other income (California, Minnesota, Vermont)

The state where you live on December 31 of the tax year typically determines which state's rules apply, though some states have complex residency rules for retirees who split time between locations. See our full state-by-state breakdown for details.

How Withholding Works

OPM withholds federal income tax from your annuity based on the Form W-4P you submit. If you don't submit one, OPM defaults to single filing status with no adjustments — which may or may not match your actual situation.

The default withholding is calculated as if your annuity is your only income. If you also have Social Security (which doesn't withhold by default) and TSP distributions, the annuity-only withholding will likely be too low to cover your total tax liability. That's how first-year retirees end up with unexpected tax bills.

You can adjust your withholding at any time by submitting an updated W-4P through OPM Services Online or by mail. For state tax withholding, you'll need to submit a separate request to OPM — state withholding isn't automatic and the process varies by state.

The COLA Complication

When your annuity gets a cost-of-living adjustment, the entire COLA increase is taxable. Your Simplified Method tax-free exclusion doesn't increase with COLAs — it's a fixed dollar amount calculated once at retirement.

This means your effective tax rate on your annuity creeps up over time. In year one, the exclusion might shield 5% of your gross annuity. After 10 years of 2% COLAs, your gross annuity is about 22% higher but the exclusion is unchanged, so the tax-free percentage drops to around 4%. Eventually, once you've recovered your entire cost basis, the exclusion goes to zero and your annuity is 100% taxable.

The Taxes on Federal Retirement toolkit covers the complete annuity taxation picture — from calculating your Simplified Method exclusion to coordinating withholding across your annuity, TSP, and Social Security — so you can walk into your CPA appointment with all the numbers organized.