Short answer: if you live in Alabama, your TRS of Alabama benefit is free of Alabama income tax. Federal income tax does apply, except on the part that returns contributions you already paid tax on. If you move to another state, that state's tax law applies. Handbook p. 31, Tax Information; pp. 10, 25, 28; Ala. Code § 16-25-23(a), 40-18-19(a)(1)
The rules
TRS of Alabama benefits are subject to federal income tax (previously taxed contributions come back tax-free over the retiree's life). If you live in Alabama, TRS of Alabama benefits are not subject to Alabama income tax; in another state, that state's law applies. Refunds, DROP distributions and the benefit are exempt from state tax. PLOP and refunds: 20% federal withholding unless rolled over. Handbook p. 31, Tax Information; pp. 10, 25, 28; Ala. Code § 16-25-23(a), 40-18-19(a)(1)
Contributions you already paid tax on, including service credit bought with after-tax money, come back free of federal tax over your lifetime. Handbook p. 31, Tax Information
Withholding and your 1099-R
Federal income tax can be withheld from your monthly benefit. You choose your withholding on the W-4P form in the Retirement Application Packet Part II. Handbook pp. 19, 21, 31 Every January, retirees get a Form 1099-R showing the benefits subject to federal income tax. It is also on Member Online Services (MOS) by January 31. Handbook p. 31, Tax Information
Lump sums
- PLOP: 20% federal withholding unless rolled over. Handbook pp. 24-25, Partial Lump Sum Option Plan (PLOP); Ala. Code § 16-25-14(j)(5)
- Refunds: 20% federal withholding unless rolled over, and possibly a 10% additional tax under age 59½. Handbook pp. 10-11, Termination of Service, Refund of Contributions; Ala. Code § 16-25-14(i)(1)
- DROP balances: the same 20% withholding unless rolled over; no Alabama income tax. Handbook pp. 27-28, Deferred Retirement Option Plan (DROP) Tier 1 Only; Ala. Code § 16-25-150(b), (c), (f), 16-25-151
Putting off tax before you retire
Sick or annual leave payouts and RSA DROP balances can be rolled over to RSA-1 when you leave employment, which puts off the tax on them. Handbook p. 33, Rollovers
In the handbook's RSA-1 example, putting $200 of a $2,000 semimonthly paycheck into RSA-1 lowers take-home pay by only $167, because it saves $33 in federal and Alabama income tax. Handbook p. 33, Tax Savings
This isn't tax advice. A tax professional can tell you how this fits your situation. To see the monthly amount you'd be taxed on, use the TRS of Alabama calculator.
From the sources
- If you live in Alabama, your TRS of Alabama benefit is not subject to Alabama income tax. It is subject to federal income tax. If you move, your new state's rules apply.Handbook p. 31; Ala. Code § 16-25-23(a), 40-18-19(a)(1)
- Refunds and lump sums (PLOP, DROP) have 20% federal tax withheld unless rolled over; no Alabama income tax applies to them.Handbook pp. 10, 25, 28
Questions
Does Alabama tax my TRS of Alabama benefit?
No, if you live in Alabama. If you move, your new state's law applies.
Is it subject to federal income tax?
Yes, except the part that comes from contributions you already paid tax on, which comes back tax-free over your life.
What about PLOP or a refund?
20% federal withholding unless you roll it over. A refund before 59½ may also owe a 10% additional federal tax.
What tax form will I get?
A Form 1099-R every January, also posted on Member Online Services (MOS) by January 31.
Is a DROP payout taxed by Alabama?
No. DROP distributions get 20% federal withholding unless rolled over, but no Alabama income tax.
Source: TRS Member Handbook, July 2026 edition (back cover "7-2026"), pp. 10, 10-11, 19, 21, 24-25, 25, 27-28, 28, 31, 33. Also: Code of Alabama Title 16, Ch. 25 and 25A. Last reviewed .