Is CalPERS Pension Taxable? Federal, State, and Exclusions

Yes, a CalPERS pension is taxable. The IRS treats it as ordinary income at the federal level, and California taxes it as ordinary income for state residents. For most retirees, the entire monthly payment is taxable, because employee contributions were deducted from paychecks before income tax applied. A narrow set of situations changes that answer: industrial disability retirement for safety employees is tax-exempt, after-tax service credit purchases create a small tax-free slice of each check, and moving out of California ends state taxation of the pension.

Why the Whole Check Is Usually Taxable

CalPERS is a qualified employer plan under Internal Revenue Code Section 401(a), so employer contributions and investment earnings grew tax-deferred throughout your career.¹ Those dollars were never taxed on the way in, so they are taxed on the way out.

Most CalPERS employers also use the IRC Section 414(h) “employer pickup,” which treats employee contributions as pre-tax. If your employer used the pickup, every dollar you contributed was deducted from your paycheck before federal and California income tax hit it. The result: your entire pension payment is taxable when you receive it. Some retirees remember contributions coming out of their checks and assume that money should come back tax-free. Under the pickup, it doesn’t.

For 2026, federal brackets for single filers start at 10% on the first $12,400 of taxable income and reach 37% above $640,600. Married joint filers hit the top bracket at $768,700.² Your pension stacks on top of Social Security, investment income, and any wages, so a moderate pension combined with other income can push some dollars into a higher bracket than you expect.

When Part of Your Pension Is Tax-Free

A smaller group of retirees has an after-tax “cost basis” in their pension. This happens if your employer did not elect the 414(h) pickup, or if you bought additional service credit using already-taxed personal funds.³ When that’s the case, a portion of each monthly check comes back to you tax-free until you have recovered your full basis.

CalPERS calculates the tax-free portion using the IRS Simplified Method, which is required for qualified plans.⁴ The formula divides your total after-tax contributions by an expected number of payments based on your age when payments begin. For example, a retiree at 62 with $26,000 in after-tax contributions has an expected 260 payments, so $100 of each monthly check is tax-free. Once you’ve received 260 payments, you’ve fully recovered the basis, and every dollar after that is taxable.

You don’t have to run this calculation yourself. CalPERS reports the taxable amount on your 1099-R each January. If you rolled pre-tax money from a traditional IRA or 401(k) into CalPERS to purchase service credit, that money creates no basis, because it was never taxed to begin with.

California State Tax

California treats CalPERS pension distributions as ordinary income under the same graduated rate schedule that applies to wages. The top marginal rate is 12.3%, and taxpayers with taxable income over $1 million pay an additional 1% Mental Health Services Tax, for an effective top rate of 13.3%.⁵ Most retirees land in middle brackets running roughly 6% to 9.3%.

California offers no blanket exemption for public pension income. A 2025 legislative analysis noted that the state “currently taxes the retirement benefits of teachers, military veterans, and other public service workers.”⁶ Residents report the taxable amount on Form 540 or Form 540 2EZ.⁷

State tax is withheld from your pension unless you opt out. You can adjust or cancel California withholding by filing Form DE 4P with CalPERS.⁸ If you never file one, CalPERS defaults to the single-filer rate, which can withhold more than a married retiree actually owes.

If You Move Out of California

Federal law bars states from taxing the retirement income of former residents. Under 4 U.S.C. Section 114, no state may impose income tax on the retirement income of a non-resident.⁹ Once you establish residency in another state, California cannot tax your pension. Only your new home state can, and eight states impose no individual income tax at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming.

Residency isn’t determined by mailing address alone. States look at driver’s license, voter registration, where you spend the majority of nights, and where your primary financial ties sit. If you split time between California and another state, California may treat you as a part-year resident and tax the pension income earned during the months you were here.

Situations That Reduce or Eliminate the Tax

Industrial Disability Retirement

Industrial disability retirement is available to safety-category employees, such as police officers and firefighters, whose disability arose from the job. CalPERS reports these benefits as tax-exempt.¹⁰ The full monthly allowance arrives free of federal income tax for as long as it qualifies as a disability payment. Once you reach what would have been your normal service retirement age, CalPERS typically converts the allowance to a service retirement and it becomes taxable like any other pension.

Non-industrial disability retirement, for employees whose disability is not job-related or who aren’t in safety classifications, is reported as ordinary taxable income.¹⁰

Public Safety Officer Health Insurance Exclusion

Retired public safety officers can exclude up to $3,000 per year of pension income used to pay qualifying health or long-term care insurance premiums, under IRC Section 402(l).¹¹ The premiums must come directly out of the retirement plan distribution. The exclusion is capped at $3,000 or the actual premium amount, whichever is less.

The 10% Early Distribution Penalty (and Why It Usually Doesn’t Apply)

Pension payments received before age 59½ are generally subject to a 10% additional federal tax on top of ordinary income tax. Two exceptions cover most CalPERS retirees who leave work early:

Non-safety members who separate from service during or after the calendar year they turn 55 are exempt from the 10% penalty on distributions from the plan.¹²
Qualified public safety employees, including police, firefighters, corrections officers, and emergency medical personnel, qualify for the exception when they separate at age 50 or after 25 years of service, whichever comes first.¹¹

These exceptions apply only to distributions taken directly from the employer plan after separation. Roll the balance into an IRA and then withdraw, and you lose the age-55 and age-50 protections.

Survivor and Death Benefits

Payments to beneficiaries carry the same taxable character as the retiree’s pension. A lump-sum death benefit is subject to mandatory 20% federal withholding on the taxable portion, but a surviving spouse can roll the taxable amount into a traditional IRA, and a non-spouse beneficiary can roll it into an inherited IRA to defer the tax.¹³

Ongoing monthly survivor benefits are withheld like payroll wages. Submit a W-4P to CalPERS with your withholding preferences; without one on file, CalPERS uses the single-filer rate, which often takes more than necessary.¹⁴

Social Security After the Fairness Act

Many CalPERS-covered jobs did not participate in Social Security. Historically, the Windfall Elimination Provision and the Government Pension Offset reduced Social Security benefits for workers who also received a public pension from non-covered employment. The Social Security Fairness Act, signed January 5, 2025, eliminated both, retroactive to benefits payable from January 2024.¹⁵ The Social Security Administration began adjusting monthly payments in February 2025 and issued one-time retroactive payments to affected beneficiaries.

A larger Social Security check means more total taxable income. Up to 85% of Social Security benefits can be federally taxable depending on your combined income, and the recent increase may push retirees into underpayment territory if withholding hasn’t been adjusted.

Reading Your 1099-R and Setting Withholding

CalPERS mails Form 1099-R each January, or posts it electronically for retirees who opt in through myCalPERS.¹⁶ The boxes that matter:

Box 1 shows the gross distribution.
Box 2a shows the taxable amount after CalPERS applies the Simplified Method for any after-tax basis.
Box 4 shows federal tax already withheld.
Box 14 shows California tax already withheld.

On your federal return, Box 1 goes on Form 1040, Line 5a, and Box 2a goes on Line 5b.⁴ For California, the taxable amount flows to Form 540 or Form 540 2EZ.⁷

Federal withholding follows the W-4P you file with CalPERS. Without one, CalPERS withholds at the single rate with no adjustments, which tends to overwithhold for married retirees and underwithhold for those with significant outside income.¹⁷ If withholding still falls short because of investment income, rental income, or a working spouse, quarterly estimated payments using Form 1040-ES may be needed. The IRS penalizes underpayment unless you’ve paid at least 90% of the current year’s liability or 100% of last year’s through withholding and estimated payments combined.¹⁸

1
Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
CalPERS. Your CalPERS Benefits: Planning Your Service Retirement
4
Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
5
Franchise Tax Board. 2025 California Tax Rate Schedules
6
CA.gov: Assembly Bill Policy Committee Analysis. AB 814
7
Franchise Tax Board. 2025 Personal Income Tax Booklet
8
EDD – CA.gov. Withholding Certificate for Pension or Annuity Payments (DE 4P)
9
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
10
California Public Employees’ Retirement System (CalPERS). A Guide to Completing Your CalPERS Disability Retirement Election Application
11
Internal Revenue Service. Publication 575 – Pension and Annuity Income
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
CalPERS. Benefits Payable
14
CalPERS. Post-Retirement Survivor Benefits: Retired Member Death Benefits (PUB 60)
15
Social Security Administration. Social Security Fairness Act: Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)
16
CalPERS. Understanding Your 1099-R Tax Form
17
Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
18
Internal Revenue Service. Estimated Taxes