What Pensions Are Not Taxable in Alabama?
Learn which pensions are exempt from Alabama state taxes, including benefits for public employees, federal retirees, and military personnel.
Some retirees in Alabama qualify for tax-free pension income depending on the source of their retirement benefits. While many states tax pensions as regular income, Alabama offers exemptions for certain public and federal retirees, making it a tax-friendly state for some.
Understanding which pensions are taxable and which are not can help retirees with financial planning.
State Systems
Alabama exempts pensions from its state-funded retirement programs, allowing eligible retirees to receive benefits without state income tax deductions. These exemptions apply to individuals who worked in government positions at the state level, including educators, judges, and other public employees. This tax-free treatment increases retirees’ take-home income.
Education Employees
Retired employees who participated in the Teachers’ Retirement System of Alabama (TRS) do not pay state income tax on their pension benefits. This includes former teachers, administrators, and school personnel who worked in Alabama’s public education system. The TRS, managed by the Retirement Systems of Alabama (RSA), provides defined benefit pensions based on years of service and salary history.
While TRS pensions are exempt from Alabama state taxes, they remain subject to federal taxation. Withdrawals from supplemental retirement accounts such as 403(b) plans or IRAs do not receive the same tax-exempt status and are taxed as ordinary income by the state. Educators should consider these distinctions when planning their retirement income.
Judicial Officers
Pensions from the Judicial Retirement Fund (JRF) of Alabama are not subject to state income tax. This system covers judges, justices, and other judicial officials who served in Alabama’s courts. The JRF provides lifetime annuity payments based on years of service and salary history.
Although these pensions are exempt from state taxation, they remain subject to federal taxes. Judicial retirees who continue working in private legal practice or other employment after retirement should be aware that those earnings will be taxed differently. Evaluating total income sources—including Social Security, investment earnings, and additional pensions—can help retirees manage their tax obligations effectively. Consulting a financial advisor can provide guidance on optimizing retirement income.
Public Employees
State and local government employees who retired under the Employees’ Retirement System of Alabama (ERS) receive tax-free pension benefits at the state level. This includes law enforcement officers, municipal employees, and state agency personnel. The ERS provides defined benefit plans based on years of service and average salary.
Although Alabama does not tax ERS pensions, retirees must still account for federal tax obligations. ERS benefits are typically subject to federal income tax, and distributions from supplemental retirement accounts like 457(b) plans or deferred compensation plans are taxed as ordinary income. Proper planning can help retirees minimize their tax burden.
Federal Civil Service
Retirees receiving pensions through the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS) benefit from Alabama’s tax exemptions. Unlike many states that tax federal pensions as regular income, Alabama does not tax these retirement benefits.
CSRS retirees, who generally do not receive Social Security benefits based on their federal employment, rely primarily on their pension income. FERS retirees, in contrast, typically receive income from a combination of their pension, Social Security, and the Thrift Savings Plan (TSP). While the FERS pension itself is exempt from Alabama state taxes, withdrawals from the TSP are not and are taxed as ordinary income by the state.
Survivor annuities paid to spouses or beneficiaries of deceased federal retirees also qualify for Alabama’s tax exemption. However, Social Security benefits and withdrawals from other retirement accounts remain subject to taxation.
Military Retirement
Military retirees receiving pensions from the Department of Defense do not pay Alabama state income tax on their retirement pay. This exemption applies to all branches of the armed forces, including the Army, Navy, Air Force, Marine Corps, Space Force, and Coast Guard. Unlike some states that impose partial taxes or income thresholds, Alabama grants a full exemption regardless of pension size or years of service.
Disability compensation from the Department of Veterans Affairs (VA) is tax-exempt at both the state and federal levels. This includes VA Disability Compensation for service-connected disabilities, as well as Combat-Related Special Compensation (CRSC) and Concurrent Retirement and Disability Pay (CRDP), which restore pension amounts offset by VA disability benefits.
For veterans who transition into federal civilian roles after military service, Alabama’s tax policies provide further advantages. Retirees who qualify for a federal pension through post-military employment can receive both their military and federal pensions free from state income tax. However, distributions from private retirement accounts such as the Thrift Savings Plan (TSP) or 401(k) plans are subject to Alabama’s standard income tax rules.
Railroad Retirement
Railroad workers receiving pensions under the Railroad Retirement Act benefit from Alabama’s tax exemptions. The Railroad Retirement Board (RRB) administers these benefits, which are divided into two tiers. Tier I benefits function similarly to Social Security, while Tier II benefits provide additional income based on career tenure in the railroad industry.
Both Tier I and Tier II payments are exempt from Alabama state income tax. However, at the federal level, Tier I benefits are taxed similarly to Social Security, meaning that up to 85% of the payments may be subject to federal income tax depending on the recipient’s combined income. Tier II benefits are taxed as private pension income at the federal level but remain fully exempt from Alabama’s state income tax.
Retirees should consider how withdrawals from other retirement accounts, such as 401(k) plans or IRAs, may impact the taxable portion of their Tier I benefits. Understanding these tax implications can help railroad retirees plan their income strategy effectively.