How Are Federal Retirement Benefits Taxed?

The FERS / CSRS basic annuity

Your monthly OPM annuity is taxable as ordinary income at the federal level. A portion of each payment is treated as a tax-free recovery of the after-tax contributions you made to the retirement system during your working years — OPM applies the Simplified Method automatically and reports the split on Form 1099-R. The taxable share is usually well over 95% of each payment.

Traditional TSP and Roth TSP

Traditional TSP withdrawals are fully taxable as ordinary income — they grew tax-deferred, and now the entire withdrawal hits the tax return. Qualified Roth TSP withdrawals (after age 59½ and after the 5-year aging rule) are entirely tax-free. The interaction between the two often drives the case for partial Roth conversions earlier in retirement.

Social Security taxation

Depending on combined income (adjusted gross income plus tax-free interest plus half of Social Security), 0%, 50%, or up to 85% of Social Security benefits become federally taxable. For most retirees with a FERS annuity plus TSP withdrawals, the 85% threshold is crossed quickly. Florida does not tax Social Security at the state level — none of it.

Florida advantage: no state income tax

Florida is one of a handful of states with no state income tax. For a federal retiree relocating from a high-tax state to Pinellas County, that often saves several percentage points of every taxable dollar of FERS annuity and TSP withdrawal — for many households a five-figure annual difference. It also makes the Roth conversion math far more attractive than in a state that taxes the conversion as ordinary income.

The early-60s Roth conversion window

Between retirement and the start of RMDs at age 75 under SECURE 2.0 (rising from 73 in 2033), many federal retirees are in their lowest lifetime tax bracket — Social Security may not have started yet, RMDs haven't begun, and the FERS supplement may have ended. Strategically converting traditional TSP or IRA balances to Roth during these low-bracket years can permanently reduce lifetime taxes and shrink future RMDs.

The right conversion amount each year depends on filling the current bracket without overflowing into the next one. This is a coordination conversation with your CPA — and one of the most common things ACM models inside the 20-minute Benefits Review.

Frequently asked questions

Educational only — not individualized tax, legal, or investment advice. Federal and state tax rules change. Confirm current IRS guidance and consult your CPA before making conversion or withdrawal decisions.

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