The handbook does not use the name 'Bailey' or describe the court case; it states only the rule above.
Federal tax
Your benefit is the maximum allowance from the formula, adjusted for your payment option. Taking a refund instead? Its taxes are below and on leaving TSERS.
Contributions have been tax-deferred since July 1, 1982. Contributions before July 1, 1982 and non-rollover service purchases are the nontaxable part of your benefit. You get a Form 1099-R each year. Handbook: Income Tax, Federal Income Tax; Handbook: Retirement and Disability Retirement Benefits
Living outside North Carolina
Non-residents may not owe N.C. tax on the benefit but may owe tax where they live; TSERS withholds only N.C. tax. Handbook: Income Tax, North Carolina Income Tax
Refunds and death benefits
Taxable portion: 20% federal withholding unless directly rolled over; possible 10% additional tax before 59 1/2; N.C. withholding of 4% on the taxable portion unless you had 5 years maintained service as of Aug. 12, 1989. Handbook: Income Tax, Income Tax on Returns, Purchases and Refunds
The active lump-sum death benefit and the $10,000 Contributory Death Benefit are generally not taxable to the beneficiary (treated as life insurance). Handbook: Income Tax, Active Death Benefits and Contributory Death Benefits
- If you live in North Carolina and had five or more years of retirement service credit maintained as of Aug. 12, 1989, your TSERS benefit isn't subject to N.C. income tax. Otherwise the taxable part is.Handbook: Income Tax, North Carolina Income Tax
- Your benefit is subject to federal income tax, except the part from contributions made before July 1, 1982 and from non-rollover service purchases.Handbook: Income Tax, Federal Income Tax
- If you live outside North Carolina, you may not owe N.C. tax on your benefit, but you may owe tax where you live. TSERS withholds only N.C. tax.Handbook: Income Tax, North Carolina Income Tax
Questions
Is my TSERS pension taxed by North Carolina?
Not if you're a North Carolina resident and had 5 or more years of retirement service credit maintained as of August 12, 1989. Otherwise, the taxable part is subject to N.C. income tax.
Is it taxed federally?
Yes, except the part from contributions made before July 1, 1982 and from service purchases not paid with a rollover.
I'm moving out of state. What then?
You may not owe N.C. tax, but you may owe tax where you live. TSERS can withhold only North Carolina tax.
This is general information from the TSERS Handbook, not tax advice. Ask a tax adviser about your situation.
Source: TSERS Handbook, Online handbook, pages modified Nov. 2024 - Oct. 28, 2026 (retrieved Nov. 11, 2026), pages Income Tax, Retirement and Disability Retirement Benefits. Last reviewed .