Understanding the Alternative Annuity Benefit for FERS and CSRS Federal Retirees
As you prepare for retirement, you might have pondered the question: Can I take my Federal Employee Retirement System (FERS) or Civil Service Retirement System (CSRS) pension as a lump sum? The thought of receiving a sizable sum upfront instead of monthly payments for life can be enticing. In this blog, we’ll delve into the concept of the “alternative annuity benefit,” which allows for a lump-sum payment of your FERS or CSRS contributions. However, there are specific criteria and considerations you need to be aware of before pursuing this option.
Understanding Cumulative Retirement
Before we delve into the alternative annuity benefit, let’s clarify what “cumulative retirement” means. Cumulative retirement refers to the total amount of contributions you’ve made to either the FERS or CSRS during your federal service. It’s essentially the nest egg you’ve built over the years for your retirement.
Historical Perspective
From 1986 to 1994, federal retirees had the option to receive their entire cumulative retirement amount as a lump sum. However, this changed, and the option was limited to those with a life-threatening condition or some “other critical medical condition.”
Alternative Annuity Benefit Explained
The alternative annuity benefit is the official term for the lump-sum option available to FERS and CSRS annuitants. It’s designed for individuals not expected to live beyond a few years at most. Here are the key points to note:
1. Eligibility: You can only opt for the alternative annuity benefit if you have an immediate retirement, and it’s not available if you retire with a disability annuity.
2. Irreversible Decision: If you choose the lump-sum option and the Office of Personnel Management (OPM) approves it, you cannot switch to a disability annuity later.
3. Application Requirements: To request the alternative annuity benefit, you must submit your retirement application with both your spouse’s written consent and a physician’s certificate confirming your medical condition.
4. Ex-Spouse Consideration: If an ex-spouse is entitled to any portion of your FERS or CSRS pension via court order, the lump-sum payment is not allowed.
Calculating the Lump Sum
The lump-sum amount you’ll receive through the alternative annuity benefit is determined by an actuarial factor based on your life expectancy. Importantly, any survivor benefits remain unaffected. Additionally, any unpaid deposits for military service, temporary service, or redeposits for refunded contributions will be considered paid and will boost the lump-sum amount.
Tax Implications
Now, let’s address the crucial issue of tax implications associated with the alternative annuity benefit:
1. Taxable Portion: The lump sum typically comprises a taxable portion, which can range from 80% to 95% of the total amount. You can roll over this taxable portion into an Individual Retirement Account (IRA) to defer taxes until withdrawal.
2. Unpaid Deposits and Redeposits: If you have any unpaid deposits or redeposits deemed paid during this process, they can also be rolled over into an IRA. However, OPM cannot facilitate this rollover; you must do it using your own outside funds within 60 days of receiving the lump-sum disbursement.
3. Withholding: If you intend to roll over 100% of the taxable portion, you must provide 20% from outside funds because OPM will automatically withhold 20% for tax purposes. It’s important to note that if you are younger than 59½, there may be additional tax implications to consider.
Conclusion
The alternative annuity benefit can be a viable option for federal retirees facing life-threatening or other critical medical conditions. It allows you to receive a lump-sum payment of your FERS or CSRS contributions, albeit with specific criteria and tax implications. Before making this decision, consult with The Benefit Coordinator to fully understand how it will impact your financial future. Ultimately, the choice between monthly payments for life and a lump sum depends on your unique circumstances and financial goals.
