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.
Federal civil service pensions in North Carolina: does North Carolina tax federal pensions.
More on public pension systems, topic by topic: North Carolina LGERS working after retirement, North Carolina LGERS retirement allowance increases and North Carolina LGERS disability retirement.
State retirement-income forms, line by line: North Carolina Schedule S.
Inherited an IRA? What the state’s own documents say about taxing those withdrawals: North Carolina tax on inherited IRA withdrawals.
Hold a 403(b) or 457(b)? What the state’s own documents say about taxing those withdrawals: does North Carolina tax 403(b) and 457(b) withdrawals.
Drawing a pension? Whether the state withholds tax from it, from its own documents: North Carolina tax withholding on pension payments.
Married, or planning for a spouse’s death? Whether the state is a community property state, from its own statutes: Is North Carolina a community property state?.
Withdrawing from an IRA or 401(k)? Whether the state withholds tax from it, from its own documents: North Carolina tax withholding on IRA and 401(k) withdrawals.
Taking money out of your TSP? How the state taxes it, from its own tax documents: Does North Carolina tax TSP withdrawals?.
A pension earned in another state, or paid after a move, is covered here: does North Carolina tax out-of-state pensions.
Trusts have their own page: does North Carolina tax trust income.
Inheriting from, or planning for, someone in this state? Whether the state has an inheritance tax, from its own tax documents: Does North Carolina have an inheritance tax?.
Dividends and interest have their own page: does North Carolina tax dividends and interest.
Making a gift or planning an estate? The state’s gift tax answer, from its own tax documents: Does North Carolina have a gift tax?.
Annuity payments have their own page: does North Carolina tax annuity income.
Planning for what you leave behind? The state’s estate tax answer, from its own tax documents: Does North Carolina have an estate tax?.
Military retired pay has its own page: does North Carolina tax military retirement.
Selling stocks, funds or real estate has its own page: does North Carolina tax capital gains.
Withdrawals from a 401(k) or IRA have their own page: does North Carolina tax 401(k) and IRA withdrawals.
The state’s income tax schedule: the North Carolina income tax rate for 2026.
The LGERS payment options, from the NC Retirement Systems Division’s own handbook: North Carolina LGERS retirement decisions.
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 the state’s own 401(k)/457 plans, and only for a retiree who had contributed or contracted to contribute before August 12, 1989, 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. |
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How our partner relationships workSocial 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.
Figures verified against the N.C. Department of Revenue Bailey Decision, Military Retirement and Standard Deduction pages, Directive PD-99-1, N.C. Gen. Stat. 105-153.5 and the House Bill 387 bill page on September 30, 2026; the January 1, 2021 start date for the military retirement deduction and the 2014 repeal date of the old general retirement exclusion were not re-checked.
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.
For your own numbers, run the Retirement Tax Comparison Tool (2026): Compare Any Two States.
See Retirement Tax Relocation (2026): The Four Taxes That Change When You Move for the full state by state breakdown.