Buying Retirement Credit

Of all the federal retirement planning topics, service credit deposits -- involving payments into your retirement fund -- is probably the most technical. You will need to get assistance from your Office of Human Capital (personnel office) if you have a deposit decision to make. To help you get started, we'll look at the three basic kinds of service credit deposits over the next three weeks. Solution The three kinds of service credit deposits are:

• Deposit for nondeduction service (covered in this column)
• Redeposit of refunded CSRS contributions (to be covered in Part 2)
• Post-1956 military service credit deposit (to be covered in Part 3)

Within the three types of deposits, there are differences depending on when the service was performed and to which retirement system the service will be credited. Here are a few definitions of key terms that come up in the process:

• Deposit: The 7 percent CSRS retirement contribution or the 0.8 percent FERS retirement contribution that is typically withheld from a federal employee's salary. An unpaid deposit is when retirement contributions were not deducted from salary or were deducted and later refunded.
• Nondeduction service: Federal civilian service that is potentially creditable for retirement, but for which no retirement deductions were withheld from salary. This includes temporary appointments, intermittent service or indefinite appointments. It also can be service that was not considered federal employment at the time it was performed, but for which a subsequent change in the law now allows credit for retirement annuity computation purposes.
• Redeposit: A repayment of refunded CSRS retirement deductions.
• Post-'56 military service: Military salaries after 1956 were subject to Social Security tax withholding. Pre-1957 military salaries were exempt from Social Security taxes. Generally, pre-'57 military service is creditable under CSRS and FERS, but post-'56 service can be credited only when a payment is made to the retirement fund. Under CSRS, a deposit is not necessary if the individual is not qualified for Social Security benefits at age 62 (or at retirement, if later than 62).

This week, we'll focus on the nondeduction service issue. If such service was performed before Oct. 1, 1982, and is being used for CSRS credit (or CSRS Offset or the CSRS portion of a transFERS benefit), then the service is creditable for retirement without payment of the deposit. The retirement benefit will be reduced by 10 percent of the unpaid deposit amount. The deposit accrues 3 percent interest compounded annually.

Here's an example:

• Retirement coverage: CSRS
• Dates of nondeduction service: Jan. 1, 1980-Dec. 31, 1980
• Amount of deposit: 7 percent (retirement contribution rate in 1980) x $10,000 (salary for the period of service) = $700
• Interest on deposit: 3 percent compounded annually: $750
• Total unpaid deposit: $1,450
• Retirement reduction: $145 per year (10 percent of unpaid deposit)

Bottom line: A deposit of $1,450 will result in a permanent increase of $145 per year to retirement benefits. As an added bonus, this increase also boosts the base for annual cost of living adjustments and for survivor benefits.

You should choose not to pay the deposit if:

• You have a place to invest $1,450 that will earn more than $145 per year, or
• You may not live more than 10 years after you retire, or
• You are not electing a survivor benefit.

If the nondeduction service was performed after Sept. 30, 1982, and is being used for CSRS credit (or CSRS Offset or the CSRS portion of a transFERS benefit) the service will count for eligibility only, not computation, unless the deposit is paid. The interest accrues at 3 percent until Oct. 1, 1985, and then switches to a variable rate each year (as high as 13 percent, and currently 4.125 percent).

An example:

• Retirement coverage: CSRS
• Dates of nondeduction service: Jan. 1, 1983-Dec. 31, 1983
• Amount of deposit: 7 percent (retirement contribution rate in 1983) x $10,000 (salary for the period of service) = $700
• Interest on deposit: Variable rates compounded annually: $2,800
• Total unpaid deposit: $3,500
• Retirement reduction: $1,600 per year (2 percent x 1 year x high-3 average salary of $80,000)

Bottom line: Pay $3,500 and receive a permanent increase of $1,600 in retirement benefits-and a boost in the base for annual cost of living adjustments and survivor benefits.

You should choose not to pay the deposit if:

• You are not planning to retire from federal service, or
• You are retiring but have a critical or terminal illness, or
• You have a place to invest $3,500 that will earn more than $1,600 per year in interest (but remember the dot-com bust and the real estate bubble), or
• Your unpaid deposit is more than you can afford to pay back and you can afford to retire without crediting the deposit service.

If the nondeduction service was performed before 1989 and is being used for FERS credit, then the deposit must be paid for the service to be creditable for any retirement purpose.

For example:

• Retirement coverage: FERS
• Dates of nondeduction service: Jan. 1, 1985-Dec. 31, 1985
• Amount of deposit: 1.3 percent (regardless of dates of service) x $15,000 (salary for the period of service) = $195
• Interest on deposit: Variable rates compounded annually: $530
• Total unpaid deposit: $725
• Retirement reduction: $800 per year (1 percent x 1 year x high-3 average salary of $80,000)

Bottom line: Pay $725 and receive a permanent increase of $800 per year in retirement benefits-and an increase in the base for annual cost of living adjustments and survivor benefits.

You should choose not to pay the deposit if:

• You are terminally ill, or
• You can invest $725 and earn more than $800 per year (yeah, right!)

If the nondeduction service was performed after 1988, then it is not creditable under FERS and no deposit can be made. This service will deducted from the service computation for retirement purposes. Nondeduction service performed on or after Jan. 1, 1989, generally is not creditable under FERS for any purpose.

Resources

• Application to Make Service Credit Payment (CSRS)
• Application to Make Service Credit Payment (FERS)
• Deposits and Redeposits under the CSRS Retirement System
• Federal Employees Retirement System (An Overview of Your Benefits)
• Chapter 21 of the CSRS and FERS Handbook (Service Credit Payments for Civilian Service)

Checklist

• Office of Human Capital: Request a review of your federal service to find out if you have any service subject to a credit payment. This can be done at the same time as a request for a retirement estimate. An estimated deposit amount can be computed.
• Internet: Use the above application to make a service credit payment to find out the exact amount owed and receive instructions for making the payment. This can be done anytime during your career, or may be processed at retirement when submitting your retirement application.

Follow-Up

Be sure to review your service to find out if you will need to pay a deposit in order to receive full credit for your federal service. This may require a phone call or an e-mail to a retirement benefits specialist in your agency's Office of Human Capital. Decide early whether you wish to pay the deposit. Make payments during your career, or save enough money to pay the deposit in a lump sum at retirement.