The Tax Map of Your Military Retirement Paycheck
What is tax-free, what is taxable, and the levers in between

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Your paycheck is several streams, not one

A retired servicemember or federal employee rarely lives on a single check. The income usually arrives as three to five separate streams stacked together: military retired pay, VA disability compensation, a Thrift Savings Plan or FERS annuity, sometimes CRDP or CRSC, and later Social Security. Each of those streams is taxed under its own rule.

The common mistake is to treat the whole thing as one lump and assume it is either all taxed or all safe. It is neither. The useful way to see it is a map that sorts every stream into three zones: tax-free, taxable, and partly taxable. Once your streams are on the map, the planning questions get much simpler.

The tax-free streams

VA disability compensation is excluded from income at every rating, from 10 percent to 100 percent. There is no 1099, no federal income tax, and because state income tax starts from your federal income, no state tax either. It is the clearest single line on the map.

Two other streams land in the tax-free zone for their own reasons. CRSC, Combat-Related Special Compensation, is tax-free, though it is limited to combat-related disabilities and has to be applied for through your branch. Qualified withdrawals from a Roth TSP also come out tax-free, because the tax was already paid on the way in.

The taxable streams

Military retired pay is taxable as ordinary federal income, and so is a traditional TSP withdrawal, because those dollars went in before tax and the tax comes due when you draw them. A civil-service FERS annuity is likewise taxed as ordinary income. Exactly how much of each stream lands in which bracket is a question for your own return and your tax professional.

CRDP, Concurrent Retirement and Disability Pay, is the one people mix up. It restores waived retired pay for retirees with 20 or more years of service and a combined VA rating of 50 percent or higher, and it is automatic. Because it is restored retired pay, it is taxable. You cannot receive CRDP and CRSC at the same time, and there is an annual window to elect whichever pays more. One is taxable and one is not, so which you choose is a real-dollars decision that turns on your own numbers. That is a question for your advisor and tax professional, not a rule of thumb.

The partly taxable stream: Social Security

Social Security sits in its own zone. A portion of the benefit can be taxable at the federal level, and how much depends on your total income for the year.

There is good news for career military and federal retirees here. The old WEP and GPO rules that once reduced some government retirees' Social Security were repealed for benefits payable from 2024 onward, and military and FERS service was always Social-Security-covered anyway, so your pension does not cut your own benefit. What remains is that the taxable share of your Social Security rises with your other income, which is exactly why the order you draw your streams matters.

Where your state sits on the map

State of residence is one of the largest levers on the whole map, and unlike your rating or your service history, it is sometimes one you can choose. Two retirees with identical federal returns can owe very different state tax simply by where they live.

New York fully exempts United States military retired pay and federal pensions, including the FERS annuity and the federal Thrift Savings Plan kept in the plan, with no cap, and it does not tax Social Security. A separate $20,000 exclusion covers other retirement income, such as private pensions and annuities, once you reach 59 and a half. Connecticut exempts 100 percent of military retired pay with no age or income test, exempts Social Security for retirees under its income thresholds, and gives a separate deduction that phases out for other pension and IRA income as your income rises. The point is not that one state wins. It is that the state line is part of the tax picture, and it belongs in the plan.

Why the order you draw matters

The map is not only about which streams are taxable. It is about when you touch them. Three timing levers do most of the work:

• The pre-59 and a half bridge. The 10 percent early-withdrawal penalty on the TSP does not apply if you separate from federal service in or after the year you turn 55, and the threshold drops to age 50, or 25 years of service, for qualified public safety employees. After 59 and a half it never applies. Knowing your own penalty-free date changes which account you should touch first.
• IRMAA's two-year memory. Your Medicare premium looks back two years at your income. A large traditional-to-Roth conversion in 2026 can raise your 2028 premium. The conversion can still be the right move; the point is to see that bill before it arrives, not after.
• Required withdrawals. Traditional balances eventually force taxable withdrawals starting at age 73, rising to 75 for those born in 1960 or later, whether or not you need the cash that year. Planning the earlier years around that fact is often where the tax savings live.

What to do with the map

The map tells you the terrain. It does not tell you your route. Your bracket, your state, your rating, your penalty-free date, and your required-withdrawal horizon are all personal, and the right sequence is the one built around them.

The practical move is to lay your own streams on the map, then work the taxable-versus-tax-free order and the conversion timing with your tax professional before you commit. Our free Veterans calculator lays the pension, VA, TSP, and state pieces out side by side, with no email required to see your result. If you want a second set of eyes, a 15-minute call is a plain conversation about your numbers.