Updated October 7, 2026. Quick answer: Usually yes, with a narrow exception. The Department of Revenue’s Directive PD-99-2 “identifies the Thrift Savings Plan (Plan) as a qualified federal retirement system”, but under the Bailey decision the exclusion reaches only retirees who were vested by August 12, 1989: the employee part of the TSP counts if the retiree “first made a contribution to the plan prior to August 12, 1989”. Everyone else starts from federal adjusted gross income, at 4.25% for 2025.
North Carolina TSP withdrawal tax treatment at a glance
| Item | What the documents say |
|---|---|
| TSP withdrawals | Taxed, except for retirees vested by August 12, 1989 under the Bailey decision |
| FERS annuity | Bailey page: FERS annuities are excludable if the retiree had five or more years of creditable service as of August 12, 1989; the TSP follows its own vesting rule (a first contribution before that date) |
| Rate or limit printed | 4.25% for tax year 2025 |
| Where it is reported | Form D-400, Schedule S, line 20 (Bailey deduction); attach Form 1099-R |
| Source | North Carolina Department of Revenue |
What the North Carolina documents say
North Carolina’s Bailey settlement lets certain federal retirees exclude their benefits. The Department’s Bailey page says the exclusion applies to benefits from plans such as the Federal Employees’ Retirement System if the retiree had “five or more years of creditable service as of August 12, 1989”, and that a retiree entitled to exclude them should claim the “deduction on Line 20, Form D-400, Schedule S”.
For the TSP the rule is separate. Directive PD-99-2 (a follow-up to PD-99-1) “identifies the Thrift Savings Plan (Plan) as a qualified federal retirement system” and says the employee part is vested if the employee “first made a contribution to the plan prior to August 12, 1989”. The employer part has its own conditions. A TSP withdrawal from someone who does not meet them is taxed like any other income that starts from federal adjusted gross income.
The 2025 D-401 instructions give the rate: “For tax year 2025, the individual income tax rate is 4.25%”.
A worked example at $30,000 of withdrawals
An illustration, not a return: a North Carolina resident takes $30,000 from the TSP in 2026. If the retiree was not vested under Bailey, the whole amount is in North Carolina income and the 2025 rate of 4.25% would put, computed as $30,000 times 4.25%, $1,275 of tax on it, before any other deduction. If the retiree was fully vested under the directive’s rules, the amount is excluded and the North Carolina tax on it is $0.
If you moved to North Carolina or left it
The rules above are North Carolina’s own, for a resident. Federal law limits what a state you have left may do: “No State may impose an income tax on any retirement income” of someone who is not a resident or domiciliary of that state, as 4 U.S.C. 114(a) puts it. The statute defines retirement income by reference to plans described in the Internal Revenue Code; this page does not decide whether a particular TSP payment meets that definition. If you moved during the year, check each state’s page and return. See CMG’s TSP withdrawal options and FERS, TSP and Social Security sequencing pages for the federal side.
What changes in 2026
The documents read for North Carolina announce no change for 2026 that is specific to TSP withdrawals. The instructions read are for tax year 2025, the newest archived; check the state agency for the 2026 forms when they are published.
What the documents do not say
- The 2025 D-401 instructions do not name the TSP; the TSP language is in two 1999 directives that the Department still serves. The employer-component vesting rules and the partial-vesting fraction (Form TSP-8) are in the directive and are not worked through here. No 2026 rate is printed in the documents read.
Common mistakes
- Assuming every federal retiree can exclude TSP withdrawals; Bailey protection depends on vesting by August 12, 1989.
- Excluding the TSP withdrawal without attaching Form 1099-R to Schedule S as the Bailey page requires.
- Assuming the answer for one state applies to another, or that the state answer changes the federal tax on the withdrawal.
Related: TSP withdrawal options, state tax on TSP withdrawals, North Carolina retirement taxes, how North Carolina taxes pensions, and how North Carolina taxes 401(k) and IRA withdrawals.
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Answer againSources
- Directive PD-99-1: https://www.ncdor.gov/taxes-forms/individual-income-tax/personal-taxes-division-directives/directive-pd-99-1
- Directive PD-99-2: https://www.ncdor.gov/taxes-forms/withholding-tax/individual-income-tax-directives-main/directive-pd-99-2
- Bailey Decision Concerning Federal, State and Local Retirement Benefits: https://www.ncdor.gov/taxes-forms/individual-income-tax/filing-topics/bailey-decision-concerning-federal-state-and-local-retirement-benefits
- North Carolina Individual Income Tax Instructions (2025 D-401): https://www.ncdor.gov/2025-d-401-individual-income-tax-instructions/open
- 4 U.S.C. 114, Limitation on State income taxation of certain pension income (U.S. Code, GovInfo): https://www.govinfo.gov/content/pkg/USCODE-2023-title4/html/USCODE-2023-title4-chap4-sec114.htm
Sources: the primary documents linked above, read on October 7, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.