Military Retirement Income Planning: Pension, TSP, VA Disability, and SBP (2026)

Military retirees have a retirement income puzzle that no generic guide covers: a defined-benefit pension that starts at age 40–45, a Thrift Savings Plan that can't be accessed penalty-free until 59½ (or with careful rollover strategy), VA disability pay that may sit alongside retirement pay under CRDP, a one-time-irrevocable Survivor Benefit Plan election at retirement, and TRICARE coverage that remains extraordinarily cheap until Medicare takes over at 65. Understanding how these five pieces interact — and how to optimize each — is the core of military retirement income planning.

Two retirement systems: High-3 vs. BRS

Whether you entered service before or after January 1, 2018 determines your retirement system:

REDUX note: A third option — CSB/REDUX — allowed members to take a $30,000 Career Status Bonus at 15 years in exchange for a reduced COLA (CPI minus 1%) through age 62. REDUX retirees received a 1.8% COLA in 2026 instead of 2.8%.¹ The purchasing-power erosion compounds significantly over a 30-year retirement. If you took REDUX, model that 1% annual COLA gap carefully.

Calculating your military pension

Both High-3 and BRS use the same base calculation, only with different multipliers:²

The High-3 average is the average of your highest 36 consecutive months of basic pay — nearly always your final three years.

Military retirement pay is federally taxable as ordinary income. VA disability compensation is completely tax-free under IRC § 104(a)(4).³

The early retirement challenge: TSP access before 59½

Most 20-year military retirees separate at age 38–46. This creates a structural mismatch: the pension provides immediate income, but the Thrift Savings Plan — typically the largest savings asset — is subject to the same 10% early withdrawal penalty as a 401(k) until age 59½.

The Rule of 55 (penalty-free TSP withdrawals if you separate in or after the year you turn 55) doesn't help a soldier who retires at 43. Options for penalty-free TSP access before 59½:

• SEPP (72(t) substantially equal periodic payments): Commit to fixed annual distributions for 5 years or until age 59½, whichever is longer. Inflexible — changing the amount triggers retroactive 10% penalties plus interest on all prior distributions.
• Roth TSP contributions (not earnings) can be withdrawn at any time without tax or penalty — they're already after-tax.
• IRA rollover + Roth conversion: Roll traditional TSP to a traditional IRA (no tax, no penalty — it's a transfer, not a distribution), then convert portions to Roth IRA each year. A Roth conversion is exempt from the 10% early withdrawal penalty per IRC § 408A(d)(3). You pay ordinary income tax on the conversion amount but no penalty. The converted funds sit in Roth IRA; contributions can come out tax- and penalty-free after 5 years.

For most early military retirees, the IRA rollover + strategic Roth conversion approach is the best path — it transforms a TSP access problem into a wealth-building opportunity.

The Roth conversion runway: a uniquely powerful opportunity

A military retiree at age 43 with only pension income has an income picture that most financial planners rarely see: 16 years before age 59½, 22+ years before Social Security, and relatively modest taxable income during those years. This creates one of the longest Roth conversion windows available to any retiree.

Consider an E-9 retiree with a $42,075 pension and no other taxable income (VA disability is tax-free):

The window isn't just wide — it's long. A 43-year-old retiree has roughly 30 years before RMDs start at age 73. Systematic Roth conversions over that window can dramatically reduce the eventual traditional IRA balance, cutting future RMDs, lowering Medicare IRMAA exposure, and protecting a surviving spouse from the single-filer tax cliff.

TSP at retirement: distribution strategy

The Thrift Savings Plan carries institutional-grade expense ratios (C, S, I, G, F funds at under 0.05%) that rival Vanguard's cheapest index funds. The decision to stay in TSP vs. roll to an IRA involves real tradeoffs:

For early military retirees doing systematic Roth conversions, rolling to a traditional IRA is usually the right call — conversion flexibility outweighs the G Fund advantage for most people. The TSP elective deferral limit in 2026 is $24,500 ($8,000 catch-up for ages 50–59 and 64+; $11,250 super catch-up for ages 60–63 under SECURE 2.0 § 109).⁴

VA disability pay: CRDP and CRSC

Prior to 2004, veterans receiving both military retirement pay and VA disability compensation faced a dollar-for-dollar offset — VA pay reduced retirement pay by the same amount. Two programs now allow many retirees to collect both:

Concurrent Retirement and Disability Pay (CRDP)

CRDP restores the retirement pay that was offset by VA disability pay. It's available to retirees with 20+ years of qualifying service AND a VA disability rating of 50% or higher.⁵ CRDP is taxable — it's treated as retired pay. With CRDP, a 20-year retiree with a 70% VA rating receives both their full military retirement pay (taxable) and their full VA disability compensation (tax-free per IRC § 104).³

Example — E-9, 22 years, 70% VA rating (2026 monthly rates):⁶

• Military retirement pay: $3,506/mo (taxable)
• VA disability at 70%: $1,808.45/mo (tax-free)
• Combined: $5,314.45/mo — both received in full

Combat-Related Special Compensation (CRSC)

CRSC is for retirees with combat-related disabilities. It replaces the portion of retired pay that is offset by VA disability pay — but unlike CRDP, CRSC is tax-free. If you qualify for both CRDP and CRSC, you elect one annually; you cannot receive both simultaneously for the same disability. CRSC is often better for retirees with high disability ratings and lower retirement pay (the tax-free advantage outweighs the difference).

SBP and DIC: the offset is gone

Previously, surviving spouses who received both Survivor Benefit Plan (SBP) annuity payments and VA Dependency and Indemnity Compensation (DIC) had SBP reduced dollar-for-dollar by DIC. That offset was fully eliminated effective January 2023.⁷ Surviving spouses now receive both SBP and DIC in full.

Survivor Benefit Plan (SBP): the irreversible election

At retirement, you elect whether to cover a beneficiary (usually a spouse) under the Survivor Benefit Plan — and how much. This decision cannot be changed after the first year anniversary of retirement (with minor exceptions).

How SBP works:

• Premium: 6.5% of the elected base amount, deducted from retirement pay before taxes (pre-tax premium).⁸
• Annuity: Surviving spouse receives 55% of the elected base amount, adjusted annually by the same COLA as retired pay (2.8% in 2026).
• Paid-up provision: Coverage becomes cost-free after 30 years of payments AND reaching age 70. No more premiums are deducted.
• Interaction with DIC: As noted above, SBP and DIC are now fully cumulative — the offset that formerly reduced SBP when DIC was payable is eliminated.

The SBP vs. term-life comparison: A common alternative to SBP is declining coverage and buying private term life insurance. SBP's advantages: it lasts as long as your spouse lives (vs. term expiration), COLA-adjusts, has no underwriting, and costs less per dollar of benefit in later years. Disadvantages: the 6.5% premium is paid forever (until the paid-up point at 70+30); if your spouse predeceases you, premiums are lost. Neither approach is universally better — it depends heavily on your health history, age gap, other assets, and spouse's income.

TRICARE: exceptional value throughout retirement

TRICARE is the most underappreciated financial benefit of military retirement. The cost differential vs. civilian coverage is enormous:

The pre-65 TRICARE advantage — roughly $15,000+/year vs. an unsubsidized civilian buying their own coverage — is one of the largest ongoing financial benefits of military retirement. At 65, TRICARE For Life wraps around Medicare as a nearly comprehensive secondary payer. The only out-of-pocket cost is the Medicare Part B premium, which triggers IRMAA surcharges if income exceeds $106,000 (single) or $212,000 (MFJ) in 2026.¹⁰ Planning your Roth conversion strategy with IRMAA thresholds in mind protects this benefit.

Social Security with a military pension

Military members have paid full Social Security taxes on all wages throughout their service, so they earn a full, unreduced Social Security benefit. This is different from CSRS federal employees (who historically didn't pay SS taxes). Military retirees who also held state or local government jobs that didn't participate in Social Security previously had their SS benefit reduced under the Windfall Elimination Provision (WEP). WEP was permanently repealed by the Social Security Fairness Act (Pub. L. 118-243, January 2025).¹¹

For an early military retiree who starts pension income at age 43, Social Security claiming becomes a pure longevity and survivor optimization decision — with no bridge gap to manage (the pension handles that). For most military retirees in good health:

• Delay SS to 70 — the pension covers income in the meantime, and VA disability adds tax-free income on top. The 8%/year delayed credit from FRA to 70 is a guaranteed real return higher than most bonds.
• For couples, the higher earner delays to 70 for maximum survivor benefit. If one spouse is a military retiree and the other isn't, the higher earner should still delay.

State taxes on military retirement pay

As of 2026, 37 states do not tax military retirement pay — either because they have no state income tax, or because they've enacted a full exemption.¹² Notable recent changes:

• Georgia (2026): Full $65,000 exemption now available at any age (previously age-restricted).
• Vermont: Full exemption for AGI ≤ $125,000; partial for $125K–$175K (effective 2025 tax year).
• California: Up to $20,000 exclusion for incomes up to $125,000 single / $250,000 MFJ.

VA disability compensation is fully exempt from state income tax in all 50 states.

Worked example: Master Sergeant Mike, age 43

Mike (born 1983) retires from the Army as an E-9 after 22 years under High-3. His spouse works part-time; they file jointly.

• High-3 average basic pay: $76,500
• Military pension: 2.5% × 22 × $76,500 = $42,075/yr ($3,506/mo); full COLA, High-3 system
• VA disability rating: 70% — $1,808.45/mo = $21,701/yr (tax-free; CRDP eligible at 70%)
• TSP balance: $380,000 (80% traditional, 20% Roth); rolled to traditional IRA at retirement
• SBP: Elected at full base amount for spouse coverage; premium is $228/mo
• TRICARE: TRICARE Select for family; ~$1,190/yr vs. ~$18,000 for comparable civilian family coverage

Phase 1: Ages 43–59½ (pre-TSP access window)

Guaranteed income: $42,075 pension + $21,701 VA disability = $63,776/yr before SS.
Spending target: $80,000/yr. Gap: ~$16,000/yr.

Mike and his wife convert $30,000/yr from the traditional IRA to Roth IRA each year. Their MFJ taxable income: pension $42,075 + $30,000 conversion − $32,200 std deduction = $39,875 — squarely in the 12% bracket. They pay approximately $4,785/yr in federal tax on the conversion at 12%. The $16,000 spending gap comes from Roth IRA contributions (penalty- and tax-free) and a small taxable brokerage.

Over 16 years, they convert $480,000 of traditional IRA to Roth at predominantly 12% rates. At 6% growth, the converted balances grow to roughly $880,000 tax-free by age 65.

Phase 2: Ages 59½–65 (full TSP access, pre-Medicare)

Taxable IRA balance after conversions: roughly $200,000 (from $304,000 original traditional TSP after 16 years of conversions, offset by growth). Mike begins supplemental IRA withdrawals for additional spending or converts more aggressively. No IRMAA risk yet — they're not on Medicare.

Phase 3: Age 65+ (TRICARE For Life, Medicare)

TRICARE For Life activates — free TRICARE as secondary to Medicare. Mike enrolls in Medicare Part B at $202.90/mo. No IRMAA surcharge — their income (pension + small IRA distributions) is below the $212,000 MFJ Tier 1 threshold, thanks to 22 years of Roth conversions shrinking their traditional IRA.

Phase 4: Age 67 and 70+ (Social Security)

Mike and his wife claim Social Security at 67 (FRA) and 70 respectively, maximizing the survivor benefit on the higher earner's record. By this point, their income picture is: pension ($42K) + SS ($52K combined) + small IRA RMDs + Roth as needed — total income managed below IRMAA thresholds with Roth as a flex valve.