How to Retire in a High-Tax State Without Getting Burned by Your TSP

July 22, 2025

If you're a federal employee planning to retire in a high-tax state—think California, New York, Massachusetts, Oregon, New Jersey—your TSP strategy may quietly cost you tens of thousands of dollars in unnecessary taxes.

And not because you saved the wrong amount.

But because you withdrew it in the wrong way, at the wrong time, from the wrong accounts.

Let's fix that.

The Hidden Tax Time Bomb for Federal Retirees

Here’s the problem most Feds miss:

Your Traditional TSP withdrawals are fully taxable at the federal level and usually at the state level, too.

Unlike Social Security—which is untaxed in most states—or capital gains, which may be taxed more favorably, your TSP is treated as plain old income. 

That means if you retire in a high-tax state, every dollar you pull from your TSP could face combined marginal rates of 30–45%.

And it doesn’t stop there.

Once Required Minimum Distributions (RMDs) begin at age 73, you’re forced to take out money whether you want to or not. Add in other income sources like pensions or Social Security, and you could push yourself into a higher bracket at the exact moment you should be minimizing taxes.

If you're planning to stay in a high-tax state, here’s how you can fight back—without moving to Florida or Texas.

✅ 1. Use the “Tax Valley” Between Retirement and 62

The moment you retire—but before you start collecting Social Security or hitting RMD age—you may have a window of artificially low income.

This is your golden opportunity to do strategic Roth conversions.

Move money from your Traditional TSP (after rolling it to an IRA) into a Roth IRA while your taxable income is low.

Yes, you’ll pay federal and state tax now—but it’ll be at a much lower rate than what you'll face in your 70s when RMDs stack on top of other income.

✅ 2. Sequence Withdrawals Intentionally

Too many retirees default to “just pull from TSP.” Instead:

  • Consider withdrawing from Roth IRAs (already-taxed dollars) to avoid bumping into higher brackets.

  • Mix in after-tax brokerage accounts or cash savings for flexibility.

  • Delay Social Security if possible—it reduces taxable income early, and gives you more room for conversions.

✅ 3. Avoid the Roth TSP Trap

While the Roth TSP is a great tool, it has one flaw: you can’t access it tax-free until you’ve had the account for 5 years AND reached age 59½.

Even if you’re over 59½, that 5-year clock doesn’t transfer when you retire and roll the Roth TSP into a Roth IRA—it restarts.

The Fix: Open a Roth IRA now, even with just a small contribution. That starts the 5-year timer ticking today, so when you roll funds over later, you’re not locked out of your tax-free access.

✅ 4. Watch Out for IRMAA Penalties

Many retirees forget that high income later in life doesn’t just mean higher taxes—it can mean higher Medicare premiums too.

If you don’t manage your TSP withdrawals and conversions carefully, you could trigger IRMAA surcharges that cost you $1,000–$5,000/year more in Medicare premiums.

A Quick Illustration

Scenario: A federal retiree in California pulls $60,000 from their Traditional TSP annually.

  • Federal tax: ~22%

  • California state tax: ~9.3%

  • Total tax drag: Over $18,000/year, just to access money they already earned.

Now imagine a 25-year retirement. That’s nearly $500,000 lost to poor tax sequencing.

This isn’t about dodging taxes—it’s about not paying more than you should.

If you're planning to retire in a high-tax state, the most powerful retirement lever you can pull isn't investment returns.

It’s tax location, withdrawal timing, and account sequencing.

—FWR