Frank spent 31 years at the Social Security Administration in Baltimore and had his retirement sorted out on paper. FERS annuity, a TSP balance just over $900,000, a paid-off townhouse. His plan was to sell and move closer to his daughter in Richmond. Then his wife, Linda, ran a tax projection for fun and went quiet. "Do you know what Maryland takes from us?" she asked. "State and county, every dollar we pull from the TSP."

They are not alone. Federal employees spend years obsessing over the federal tax bill on TSP withdrawals and almost no time on the second bill that arrives from the state.

The basic rule: your state of residence gets the say

Traditional TSP withdrawals are taxable income at the federal level, no matter where you live. The state side varies enormously. Under federal law, a state generally cannot tax the retirement income of someone who doesn't live there. So the state that matters is your state of legal residence (your domicile) when you take the money. It doesn't matter where you worked or where you earned the balance.

That is why a career in high-tax Washington, D.C., or Maryland doesn't saddle you with those taxes forever. Where you land is what counts.

The three broad buckets

States tend to fall into three groups. The details shift with legislation, so treat this as a map, not a verdict.

No income tax at all

Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don't tax wage or retirement income. Tennessee and New Hampshire once taxed investment income but have phased those taxes out, so neither taxes TSP withdrawals today. If a state has no broad income tax, your traditional TSP distributions are only a federal matter.

Income tax, but retirement income is exempt or largely exempt

A few states with income taxes carve out retirement distributions. Illinois and Mississippi exempt most retirement plan income. Pennsylvania exempts distributions once you've reached retirement age, generally 59½. Iowa exempts retirement income for residents 55 and older. Other states offer partial exclusions or age-based breaks that vary by income level, and some of those exclusions are written for pensions and don't extend cleanly to a 401(k)-style account like the TSP. Read the fine print, or ask a preparer who handles your state.

Full or mostly full taxation

California, Oregon, Minnesota, New York, New Jersey, and a good many others tax TSP withdrawals as ordinary income, sometimes with small deductions for seniors. Top rates run from about 4 percent to over 10 percent. Some cities and counties pile on, as in Maryland and parts of New York and Ohio.

What the difference looks like in dollars

Say you and your spouse need $70,000 a year from your TSP to supplement a FERS annuity, and your state treats that income as taxable at an effective rate of about 4.5 percent after deductions. That's roughly $3,150 a year. Over a 25-year retirement, that's close to $79,000, before counting what that money could have earned if it stayed invested.

Now move the same couple to a no-income-tax state. The $3,150 doesn't vanish into thin air; it sits in your pocket. But be honest about the other side of the ledger. Some no-income-tax states make up the revenue elsewhere, through higher property taxes, sales taxes, or insurance costs. Florida's homeowners insurance market is a good example of a cost that can swamp a tax savings. Texas has famously high property taxes.

So the question isn't "which state has the lowest income tax?" It's "which state costs me the least in total, for the life I actually want to live?"

Don't forget the other income streams

Your TSP is only one piece. Check how a state treats:

  • Your FERS annuity. Some states exempt it, some partially exempt it, some tax it fully.
  • Social Security. A handful of states still tax benefits, though the list has been shrinking. Check your state's current rules.
  • Roth TSP withdrawals. Qualified Roth distributions are generally untaxed federally, and most states follow that treatment. This is where a Roth balance earns its keep, since it can reduce your taxable income in any state.
  • Required minimum distributions. These begin at 73 for many retirees, and 75 for those born in 1960 or later. You can't skip them, so a high-tax state can't be avoided by simply waiting.

Strategies worth considering

Move first, then draw down. If you're already planning to relocate, consider timing large withdrawals or Roth conversions for after you've established residency in the lower-tax state. A conversion done in Maryland is taxed by Maryland. The same conversion done a year later in Florida isn't.

Mind the conversion window. The years between retirement and RMDs are often your lowest-income years. Converting part of your traditional TSP or IRA to Roth in that window can lower future RMDs. Just price in the state tax on the conversion, which may tilt the decision in a high-tax state.

Make the move real. States don't take your word for it. If you keep a home, a driver's license, voter registration, and a doctor in your old state, its tax department may argue you never left. Spend your days in the new state, update your documents, and keep records. Part-year residency has its own filing rules, so ask a tax professional when you're switching mid-year.

Plan for withholding. The TSP withholds federal tax from payments by default, and state withholding rules vary. Check tsp.gov for current options, and if nothing is being withheld for your state, plan on estimated payments so you aren't surprised in April.

Where Frank and Linda ended up

They did run the numbers. Virginia's top rate is 5.75 percent, and its age-based deduction for those 65 and older helped, but only after they hit the age and stayed under the income thresholds. For their first few years they'd get less relief than they'd assumed. They kept Richmond as the plan, since family mattered more than the difference, but they changed their approach. They made a few larger Roth conversions before the move, and they'd draw more from the TSP after establishing Virginia residency and claiming every deduction available to them.

That's a perfectly good outcome. Taxes shouldn't dictate where you live. But they should be a line on the checklist before you list the house, not a surprise in the first spring after you retire.

Before you decide

Brackets, exemptions, and age thresholds change from year to year, so confirm the current rules with your state's department of revenue. For federal figures, including brackets, RMD ages, and conversion rules, see irs.gov, and for current withdrawal and withholding options, tsp.gov. If you're weighing a move with real money at stake, an hour with a CPA who knows both states is cheap insurance.