Updated September 4, 2026. Quick answer: It depends entirely on when you were vested. North Carolina’s “Bailey settlement” fully exempts government pensions, state, local, and federal alike, for anyone with 5+ years of creditable service as of August 12, 1989. Everyone else’s government pension, and every private-employer pension, is fully taxable. There is no general retirement-income exclusion to soften that for the rest.
Confidence note: high. This page is scoped to pension, IRA and 401(k) taxation specifically. For the state’s full retirement-tax picture (Social Security, tax rates, estate and probate), see how North Carolina taxes retirement income generally.
Pending, not current law: House Bill 387 (2025 to 2026 session) would eliminate the August 12, 1989 vesting cutoff entirely and exempt all government retirement income; still in committee, not law.
How pensions and retirement-account withdrawals are taxed
| Public (state/local government) pensions | Fully exempt if the retiree had 5+ years of creditable service as of August 12, 1989 (the Bailey settlement); otherwise fully taxable, with no dollar cap either way, a pure vesting-date test. |
|---|---|
| Private (employer) pensions | Fully taxable. North Carolina’s list of allowed subtractions from federal AGI has no line for private employer pensions. |
| Federal government pensions (FERS/CSRS) | Same Bailey test as public pensions: fully exempt if vested (5+ years) by August 12, 1989, otherwise fully taxable. This equal treatment traces directly to Davis v. Michigan (1989), which barred taxing federal retirees worse than state retirees. |
| Military retirement pay | Fully exempt for retirees with 20+ years of service, or medically retired under 10 U.S.C. Chapter 61, effective for tax years beginning January 1, 2021, expanded to all uniformed services January 1, 2022. |
| IRA and 401(k)/403(b) distributions | Fully taxable. Only pre-August-1989 contributions to the state’s own 401(k)/457 plans share in the Bailey exclusion; ordinary IRA, private 401(k) and 403(b) distributions get no exclusion at all. |
| General retirement-income exclusion | None. North Carolina’s old $2,000 to $4,000 general retirement exclusion was repealed for tax years beginning on or after January 1, 2014, and there is no age-65 addition to the standard deduction. |
Coordinate this with your overall retirement plan
An adviser can help weigh how much of a pension or IRA withdrawal to take this year, whether a Roth conversion makes sense before or after a move, and how state tax interacts with the rest of your plan, but that does not replace the numbers in your own return.
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Social Security
Social Security is never taxed by North Carolina, regardless of vesting date or income. Social Security has its own rules in every state; see the full breakdown in how North Carolina taxes retirement income generally.
Statute and sources
Governing citation: N.C. Gen. Stat. sec. 105-153.5(b)(5) (Bailey), (b)(5a) (military).
- N.C. Dept. of Revenue, Bailey Decision
- N.C. Gen. Stat. sec. 105-153.5
- N.C. Dept. of Revenue, Directive PD-99-1 (Davis v. Michigan)
Read September 4, 2026.
Related: how North Carolina taxes retirement income generally · does North Carolina tax Roth conversions? · Roth conversion taxes, all 51 jurisdictions.
General information drawn from each state’s own published statutes and revenue-department guidance, not legal, tax or financial advice. Figures and exemption amounts are current as of the date in the quick answer, are set by state law, and can change by future legislation; any pending bill named on this page is not yet law. This page cannot see your own return, which governs. We are not a law firm, a tax adviser, or a fiduciary, and this is not personalized advice.