Best States for Federal Retirees: Pension, TSP, and Tax Breaks

The best states for federal retirees are the nine with no personal income tax and the eight or so that fully exempt federal civil service pensions from state tax. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming take nothing off your CSRS or FERS annuity, your TSP withdrawals, or your Social Security. Alabama, Hawaii, Illinois, Kansas, Massachusetts, Mississippi, New York, and Pennsylvania collect income tax generally but leave federal pensions alone. Which of those is actually best for you depends on property taxes, how your TSP is treated, estate tax exposure, and where you can get the healthcare you want.

The Nine States With No Income Tax

In these states your annuity, TSP distributions, Social Security, and investment income all escape state taxation entirely. New Hampshire used to tax interest and dividends, but that levy was fully repealed for tax years beginning after December 31, 2024, making its no-tax status complete in 2026.1NH Department of Revenue Administration. Interest and Dividends Tax

The revenue has to come from somewhere. Property taxes in these nine states run roughly 8 to 12 percent above the national average, and sales taxes 18 to 21 percent higher. Texas charges no income tax but has some of the highest property tax rates in the country. Tennessee and Washington both carry combined state-and-local sales tax rates near or above 9 percent. A retiree who owns a home and spends most of their money locally can watch a good share of the income tax savings reappear as property tax and sales tax.

Still, if your income is mostly annuity and Social Security, the math usually favors these states. Just run the total tax picture, not the income tax line.

States That Fully Exempt Federal Pension Income

Several states with regular income taxes carve out a complete exemption for federal retirement pay. Your CSRS or FERS annuity is subtracted from taxable income entirely, no matter how large.

If you collect a $40,000 FERS annuity in New York, the full amount comes off your state taxable income. Wages from post-retirement work, dividends, or rental income are still taxable, but the core pension is protected. These states are strongest for retirees whose income leans heavily on the annuity itself.

Partial Exemptions That Can Still Zero Out the Bill

A handful of states offer deductions large enough to eliminate state tax on a moderate federal pension.

Colorado allows retirees 65 and older to subtract up to $24,000 in pension and annuity income; those between 55 and 64 can subtract up to $20,000.9Colorado Department of Revenue. Individual Income Tax – Information for Retirees

Delaware gives residents 60 or older a $12,500 pension exclusion, dropping to $2,000 for those under 60 who are already drawing a pension. The $12,500 cap is combined and covers all eligible retirement income, including pensions, 401(k) distributions, IRA withdrawals, interest, dividends, and capital gains.10Delaware Division of Revenue. Personal Income Tax FAQs

Georgia is one of the more generous. Retirees 65 and older can exclude up to $65,000 of retirement income; those 62 to 64 can exclude up to $35,000.11Georgia Department of Revenue. Retirement Income Exclusion Qualifying income includes pensions, interest, dividends, capital gains, rental income, and up to $5,000 of earned income, and a married couple filing jointly where both spouses qualify can double the exclusion. A $50,000 FERS annuity plus modest investment income can fall entirely within the exclusion.

Michigan phased in a retirement income subtraction that reaches 100 percent for the 2026 tax year, effectively giving a full deduction of pension and retirement benefits regardless of birth year.12State of Michigan. Retirement and Pension Benefits Starting in 2026, Michigan is functionally a full-exemption state for federal retirees.

Watch the TSP

Here is where federal retirees get tripped up. A state that exempts your CSRS or FERS annuity does not necessarily exempt your Thrift Savings Plan withdrawals. The TSP functions like a 401(k), and many state tax codes treat defined contribution distributions differently from a traditional government pension. The TSP itself does not withhold state or local taxes but does report all distributions to your state of residence.13Thrift Savings Plan. Tax Rules About TSP Payments

Some states cover both. Illinois exempts income from 401(k)s and government deferred compensation plans alongside traditional government pensions.3Illinois Department of Revenue. Does Illinois Tax My Pension, Social Security, or Retirement Income Pennsylvania and Mississippi define exempt retirement income broadly enough to include TSP.8Pennsylvania Department of Revenue. Do I Have to Pay PA Income Tax on My Retirement Pension After I Retire Others exempt “government pensions” or “civil service annuities” in language that may not reach a defined contribution plan. Before picking a state on the strength of its pension exemption, confirm with the state revenue department that the exemption also applies to TSP withdrawals.

Social Security Is Rarely the Problem

As of 2026, only eight states tax Social Security to any degree: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. West Virginia previously taxed benefits but fully exempted them starting with the 2026 tax year.

Even in those eight, the actual bite is often small. Colorado exempts Social Security entirely for residents 65 and older. New Mexico exempts it in full for individuals with adjusted gross income under $100,000, or $150,000 for joint filers. Connecticut exempts benefits for individuals under $75,000 AGI and couples under $100,000. Most of the rest use partial exemptions or income-based phase-outs that shelter moderate incomes. If your combined income is high, though, the surcharge in one of these states can add up over a long retirement.

Property Tax Will Find You

Property tax is the tax you cannot avoid by choosing the right state for income. Effective rates range from under 0.5 percent in some states to over 2 percent in others. A no-income-tax state with a 2 percent effective property tax rate on a $300,000 home costs $6,000 a year just in property tax, which can swallow much of the income tax savings.

Many states offset this with senior programs. Homestead exemptions reduce the taxable value of a primary residence, often with higher limits once the homeowner turns 65. Some jurisdictions freeze the assessed value or tax bill at the level it was when you turned a certain age. A few states and counties allow outright deferral, so nothing is owed until the home is sold or transferred.

If you also served in the military, the picture can improve further. Many states offer partial or full property tax exemptions for veterans with a service-connected disability, and a 100 percent disability rating often qualifies for a complete exemption on the primary residence. These programs vary and typically require an application through the county assessor’s office, so check local rules early in a move.

Estate and Inheritance Taxes

The federal estate tax exemption for 2026 is $15,000,000 per person, which shelters most estates.14Internal Revenue Service. Whats New – Estate and Gift Tax About a dozen states and the District of Columbia impose their own estate taxes at much lower thresholds. Oregon starts at $1,000,000; Massachusetts at $2,000,000. For a retiree whose pension savings, TSP balance, home equity, and life insurance push their estate above these state levels, the state estate tax becomes a real cost to survivors.

Five states impose an inheritance tax, which the recipient pays: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland imposes both. Pennsylvania’s inheritance tax is worth noting because the state is otherwise one of the most pension-friendly in the country. Surviving spouses are typically exempt, but transfers to children, siblings, and other beneficiaries can be taxed at roughly 4 to 15 percent depending on the state and the relationship.

A state with excellent pension treatment but a low estate tax threshold may not be the best long-term choice if leaving assets to heirs matters to you.

Healthcare and FEHB Geography

Federal retirees who kept Federal Employees Health Benefits coverage for at least five years of service immediately before retirement can carry FEHB into retirement.15U.S. Office of Personnel Management. Continuing FEHB Coverage into Retirement FEHB coordinates with Medicare at 65, and some plans reimburse part or all of the Medicare Part B premium.16U.S. Office of Personnel Management. Annuitant Where you live determines which FEHB plans are available and how deep the provider network is.

Proximity to VA medical centers and military treatment facilities also matters for retirees with dual eligibility. Denser federal healthcare infrastructure means more options for specialized care without long drives. Look at where those facilities cluster, not just the tax code.

Make the Residency Change Stick

None of this works unless you actually become a resident of the new state for tax purposes. Every state sets its own rules, and some departing states are aggressive about holding on. Establish domicile by making the new state the center of your life: register to vote there, get a new driver’s license, change your mailing address with OPM and the TSP, and spend most of your time in the new location.

New York uses a 184-day presence test alongside domicile analysis. Keep a home there and spend more than 183 days in the state, and you remain a New York statutory resident regardless of where you claim domicile. Filing a declaration of domicile in Florida while keeping a New York apartment for summers will not do it. The departure state looks at the totality of your ties, and the burden of proof is on you.

The safest approach is a clean break: sell or fully relinquish the old home, move your bank accounts, update all federal records, register to vote, and keep records of where you actually spend your days. Retirees who try to split the difference between two states often end up claimed by the less favorable one.