Do federal annuitants need to receive their FERS or CSRS income on a monthly basis? Learn about the alternative annuity benefit.
If you ever look at your paystub and wonder what “cumulative retirement” means, it refers to the total amount of contributions that you have made to either FERS or CSRS. And many might wonder, upon retirement - can’t they just take this full amount instead of receiving guaranteed monthly payments for life? And while from 1986 to 1994, this was generally true for most federal retirees, the law was changed so this “alternative annuity benefit” is only available to those with a life-threatening condition or some “other critical medical condition.” Ultimately, OPM will determine one’s eligibility for the lump-sum payment when processing their retirement application.
Attend our next no-cost webinar on Survivor Benefits for federal employees and annuitants-
The alternative annuity benefit is a lump-sum option available to those who are not expected to live beyond a few years, at most. This can only be done with immediate retirements, and is not available if you retire with a disability annuity. If you request the alternative annuity benefit, it cannot be switched to a disability annuity after OPM has finished processing the retirement claim – regardless of whether or not they approved the alternative benefit. For those requesting the lump-sum, they must submit their application with both their spouse’s written consent and a physician’s certificate verifying the medical condition. If an ex-spouse is entitled to any portion of their FERS or CSRS pension via court order, the lump-sum payment is not allowed.
The alternative benefit is a reduced lump-sum credit for FERS or CSRS annuitants with the dollar amount determined by an actuarial factor based on life expectancy. Any survivor benefits are not affected. However, any unpaid deposits for military service, temporary service, or any redeposits for refunded contributions all are considered paid and will boost the lump-sum amount.
Tax Implications
Note that alternative annuity benefit creates a tax liability, even if it is eventually returned to OPM. With the lump sum, there is usually a taxable portion and a non-taxable portion. The taxable portion, which is typically 80% - 95% of the total amount, can be rolled over to an IRA so taxes won’t be due until withdrawn from there. Any unpaid deposits or redeposits deemed paid can be rolled over, but OPM cannot do this themselves. The federal retiree would have to use their own outside cash to move that portion into an IRA, and this must be done within 60 days of the lump-sum disbursement.
Also, if you plan to rollover 100% of the taxable portion of the payment, you must provide 20% from outside funds because OPM will automatically withhold 20% from the benefit amount for tax purposes. If you’re younger than 59½, there might be other tax implications to watch out for.
----
Until Next Time,
You Might Also Enjoy This Podcast
**Written by Benjamin Derge, Financial Planner, ChFEBC℠ The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.
