How FERS Retirement Tax Withholding Works on Your Annuity

FERS retirement tax withholding starts automatically the moment your annuity begins: the Office of Personnel Management withholds federal income tax from every monthly payment as if you were single with no adjustments, and it keeps doing that until you file a Form W-4P telling it otherwise.¹ That default overwithholds for most married retirees and underwithholds for retirees with heavy outside income, so the useful question is not whether tax is coming out but whether the right amount is.

The Default Rate and Why It Rarely Fits

Federal law treats your annuity like wages for withholding. Under 26 U.S.C. § 3405, OPM must withhold federal income tax from every periodic pension payment unless you file a certificate choosing a different amount or opting out entirely.² With no W-4P on file, the withholding table is single filer, no credits, no other adjustments.¹

If your first annuity payments look lighter than you expected, this is almost always why. Married filing jointly, dependent credits, and larger standard deductions all lower your actual tax, but none of that is baked into the default. You can also elect zero withholding, though that shifts the whole tax bill to quarterly estimated payments.

Only Part of Each Payment Is Taxable

During your career you contributed a percentage of every paycheck to the retirement fund with after-tax money. The IRS lets you recover that cost tax-free over your retirement using the Simplified Method.³ Divide your total after-tax contributions by a number from an IRS table based on your age when the annuity starts, and the result is the tax-free portion of each monthly payment.

For annuities starting after November 18, 1996, where only the retiree receives payments, the divisors are:

55 or younger: 360
56 to 60: 310
61 to 65: 260
66 to 70: 210
71 or older: 160

A survivor annuity uses a separate table based on combined ages, which produces a larger divisor because payments are expected to run longer.³

An example. You retire at 60 with $31,000 in after-tax contributions. Your divisor is 310, so $100 per month is tax-free. On a $2,500 gross annuity, only $2,400 is taxable. The $100 exclusion continues until you have recovered the full $31,000 or collected 310 monthly payments, whichever comes first. After that, every dollar of annuity becomes fully taxable.³

How to Change Your Withholding

You can start, change, or stop federal withholding at any time. Before you do, find your CSA claim number (CSF if you are a survivor annuitant). It came in your welcome letter from OPM and appears on every annuity statement.⁴

Online

The fastest route is OPM’s Retirement Services Online portal, which handles both federal and state withholding.⁵ Changes submitted early in the month are processed mid-month and take effect on the first business day of the following month.⁶ A change submitted June 3 should show up on the July payment.

By Mail With Form W-4P

Complete IRS Form W-4P and mail it to the OPM Retirement Operations Center at P.O. Box 45, Boyers, PA 16017.⁷ Four parts of the form matter:

Step 1 sets your filing status: single, married filing jointly, or head of household. This drives the withholding table.⁸
Step 2 accounts for income from a job or another pension, including a spouse’s if you file jointly.
Step 3 claims dependent credits: $2,200 per qualifying child under 17 and $500 per other dependent for 2026.⁹
Step 4 covers other adjustments: report interest, dividends, or Social Security income with no withholding of its own; claim deductions above the standard amount; or request an extra flat dollar amount withheld from each payment.

Step 4(c) is the simplest lever if you consistently owe a little at filing time. Adding $50 or $100 to each payment fixes most modest shortfalls without any quarterly paperwork. Mailed forms take longer to post than online changes, so submit well before mid-month if you want the change on the next payment.

State Withholding Is Not Automatic

State tax treatment varies. Some states have no income tax, some specifically exempt government pensions, and most others treat FERS income as ordinary taxable income, sometimes with partial exclusions.

Here is the trap: state withholding through OPM is voluntary, and it only works if your state has signed a formal agreement with OPM.¹⁰ OPM will never start state withholding on its own. You have to ask. If your state has no agreement, or if you prefer to handle it separately, you owe estimated quarterly payments to your state revenue department.

Other FERS Payments With Their Own Rules

The withholding rules above cover your basic annuity. Other payments you may receive at or after retirement follow different tracks, and confusing them causes most of the April surprises.

The Special Retirement Supplement

If you retire before 62 on an immediate annuity, the Special Retirement Supplement approximates the Social Security benefit you earned during federal service and runs until age 62. It is fully taxable as ordinary income; there is no tax-free cost-recovery portion because the supplement is not funded by your after-tax contributions.

The supplement also has an earnings test. Wages or self-employment income above the Social Security annual exempt amount ($24,480 in 2026) reduce the supplement by $1 for every $2 over.¹¹ Pension income, investment earnings, and annuity payments do not count toward that limit. The supplement stops at the end of the month you turn 62.¹²

Lump-Sum Annual Leave Payout

When you separate, you receive a one-time payment for unused annual leave. It is treated as a supplemental wage payment and withheld at a flat 22%.¹³ Social Security and Medicare taxes also apply for FERS employees. Whether 22% is enough depends on the rest of your year; retirees in higher brackets often owe more at filing.

Thrift Savings Plan Withdrawals

Your TSP account has its own withholding, separate from OPM’s:

Monthly payments expected to last 10 years or more, or based on life expectancy, are withheld as single with zero adjustments. You can change this in your TSP account.
Single withdrawals and installments lasting fewer than 10 years get a mandatory 20% federal withholding, because the IRS treats them as eligible rollover distributions.
Required minimum distributions get 10% withholding unless you choose a different rate.

Those rates apply only to the taxable portion.¹⁴ Roth TSP contributions you already paid tax on come out tax-free; the earnings on them are tax-free only if you meet the qualified distribution rules. If you are rolling TSP money into an IRA or another plan, you use Form W-4R rather than W-4P.¹⁵

Getting to the Right Total Withholding

If your withholding falls short of your actual tax, the IRS charges an underpayment penalty on the shortfall for each quarter it existed.¹⁶ The safe harbor is to have withheld at least 90% of the current year’s tax or 100% of last year’s tax, whichever is smaller. That last-year figure rises to 110% if your adjusted gross income was over $150,000.

Retirees with several income streams often find that annuity withholding alone falls short once TSP distributions, Social Security, and investment income pile on. Rather than filing quarterly estimates with Form 1040-ES, the cleanest fix is to raise the extra amount on Step 4(c) of your W-4P. Every dollar withheld from your annuity counts toward your annual tax, and there is no quarterly deadline to track.

1
U.S. Office of Personnel Management. Tax Information for Annuitants
2
Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
3
Internal Revenue Service. Publication 721 – Tax Guide to U.S. Civil Service Retirement Benefits
4
U.S. Office of Personnel Management. What Is the OPM Retirement Claim Number
5
U.S. Office of Personnel Management. Retirement Services – My Annuity and Benefits
6
U.S. Office of Personnel Management. How Do I Change My Voluntary Withholdings
7
U.S. Office of Personnel Management. Change Your Mailing Address
8
Internal Revenue Service. Form W-4P 2026 – Withholding Certificate for Periodic Pension or Annuity Payments
9
Internal Revenue Service. Child Tax Credit
10
eCFR. 5 CFR Part 831 Subpart S – State Income Tax Withholding
11
Social Security Administration. Receiving Benefits While Working
12
U.S. Office of Personnel Management. RI 92-22 FERS Annuity Supplement Earnings Report
13
Internal Revenue Service. Employers Tax Guide – Publication 15
14
Thrift Savings Plan. Tax Rules About TSP Payments
15
Internal Revenue Service. About Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
16
Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax