Short answer: no. Alabama does not tax your military retirement pay. It does not tax your Survivor Benefit Plan either.
If you retired from the military and settled in North Alabama, that is real money that stays in your pocket every month. A lot of folks who move here from other states are surprised by it. But there is a second question that matters just as much. And unlike your taxes, you usually only get one shot at it.
Alabama stopped taxing military retirement pay in 1989. There is no age limit and no income limit. If it is military retirement pay, the state leaves it alone.
A few other things work in your favor here:
Here is the one catch. Your TSP is treated differently than your pension. Money you take out of a traditional TSP, 401(k), or IRA is generally taxed by Alabama. Once you turn 65, the first $6,000 of those withdrawals is excluded. So on the same tax return, your pension is untaxed and your TSP mostly is not. It surprises people.
This is the part that catches families off guard. Your military retirement pay stops the day you die. It does not carry over to your spouse. The Survivor Benefit Plan, or SBP, is the program that keeps part of it going. Think of it as insurance on your pension. Here is how it works:
A real example: say your retired pay is $4,000 a month and you cover all of it. You pay about $260 a month. Your spouse would receive about $2,200 a month for life. And once you hit age 70, if you have paid in for 30 years, the payments stop and the coverage stays.
You make this choice when you retire, on a form called the DD 2656. Then it locks in. If you are married and do nothing, you are automatically signed up for full coverage. If you want to turn it down or take less, your spouse has to sign off in writing and get it notarized. That is not a formality. It is the law, and it exists so nobody finds out after the fact.
There is exactly one chance to back out. It falls between the second and third anniversary of your first retirement check. You do not get your premiums back, and your spouse has to agree. After that window closes, the decision stands.
There used to be a rule people called the widow’s tax. If your spouse received VA survivor benefits (called DIC), the SBP payment was cut dollar for dollar. Many widows ended up receiving nothing at all from SBP. That rule is gone.
As of January 1, 2023, a surviving spouse can receive both payments in full. So if you said no to SBP because of that old rule, you were doing math that no longer applies. Your SBP choice itself may be locked in, but the rest of your survivor plan is not, and it is worth another look.
Your spouse will owe federal income tax on SBP payments. Alabama, though, does not tax them. Same treatment as your retirement pay.
SBP is one piece of a bigger picture. It works alongside your life insurance, your VA benefits, the beneficiary forms on your TSP and IRA, and your will or trust.
And if you moved to Alabama from somewhere else, your estate documents were probably written under a different state’s rules.
At Investor’s Resource here in Huntsville, we sit down with military retirees and their families and walk through how these pieces fit together, so decisions get made with the full picture in front of you. If you would like to talk yours through, we would be glad to—Your Trusted Partner for Life.