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Redepositing CSRS Refunds

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Last week, we began our review of the three different kinds of service credit deposits -- additional payments into your retirement fund based on previous federal service -- by discussing nondeduction service credit payments. This week, we'll look at redeposit of CSRS refunded contributions. Solution Redeposits are sums of money paid into the retirement fund by an employee or survivor to cover a period of service during which CSRS deductions were withheld but later refunded. Refunded FERS contributions cannot be redeposited. If the service for which deductions were refunded ended before Oct. 1, 1990, the employee does not have to make a redeposit to receive credit for the refunded service. Full credit will be allowed for the length of the refunded service, but the employee's annuity will be reduced based on age and life expectancy -- the younger the employee, the smaller the annual reduction. If the application for the refund was received by the Office of Personnel Management after Sept. 30, 1982, the interest on the refund 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). If the application for refund was received prior to Oct. 1, 1982, then a 3 percent rate of interest is compounded annually on the unpaid redeposit amount. (Note: If the period of service that the refund covers was less than five years and the employee is now under FERS, see the FERS example below.) Here's an example:
  • Retirement Coverage: CSRS (or CSRS Offset or the CSRS component of a transFERS benefit)
  • Dates of Refunded Service: Jan. 1, 1978 - Dec. 31, 1987
  • Amount of Refund: 7 percent (retirement contribution rate) x $284,000 (salary for period of service) = $19,880
  • Interest on Redeposit: Variable percentage compounded annually: $41,265
  • Total Unpaid Redeposit: $61,145
  • Age of Employee at Retirement: 55
  • Retirement Reduction: $61,145/211.9 (present value factor for age 55) = $289/month or $3,468/year

Bottom line: Pay $61,145 and avoid a reduction of $3,468 per year to your retirement benefits. Or don't pay the redeposit and keep $61,145 invested where the principal is still available to you and there is potential to earn enough on your investment to offset the reduction to your retirement. This reduction does not affect a survivor annuity.

You should pay the redeposit if you have a long life expectancy and you are intolerant of any risk (for example, if you have 100 percent of your Thrift Savings Plan account in the G Fund).

You should not pay if:
  • You want to keep the $61,145 available for later use and you feel you can get a return of 6 percent or higher on your investment.
  • You are in poor health and have elected a survivor benefit.
  • You don't have $61,145 available. In that case, invest more in your TSP account and diversify in the five investment options or use the L Funds. This investment can be used to offset the reduction to your CSRS retirement.
  • You plan to work long enough that you can retire comfortably even though there will be a reduction for the unpaid redeposit applied to your retirement.
  • You are much older than 55 at retirement, but you are in excellent health. The actuarial reduction for a 65-year-old would be computed as: $61,145/163 = $375/month or $4,501/year. The reduction for a 75-year-old would be: 61,145/113.5 = $538/month or $6,456/year.

If an employee's refunded service ended after Sept. 30, 1990, he or she must pay the redeposit in order to receive credit for the service in the annuity computation. The service would be eligible for credit toward retirement eligibility.

An example:
  • Retirement Coverage: CSRS (or CSRS Offset or the CSRS component of a transFERS benefit)
  • Dates of Refunded Service: Dec. 1, 1982-Dec. 31, 1991
  • Amount of Refund: 7 percent (retirement contribution rate) x $402,000 (salary for the period of service) = $28,140
  • Interest on Redeposit: Variable percentage compounded annually: $34,901
  • Total Unpaid Redeposit: $63,041
  • Retirement Reduction: If you do not pay the redeposit, your service will not be used in the computation of retirement benefits. Here is an example of what this service could be worth: $80,000 (high-three average salary) x 2 percent x 10 years of service = $16,000 / year

Bottom line: Pay $63,041 and receive a permanent increase of $16,000 per year to the retirement benefit. As an added bonus, this increase in retirement also increases the base for annual cost of living adjustments and for survivor benefits. Once an employee is retired for a little less than four years, the amount of the redeposit would be recovered in increased retirement payments.

You shouldn't pay the redeposit if:
  • You are not planning to retire from federal service.
  • You are retiring but have a critical or terminal illness.
  • You have a place to invest $63,041 that will earn more than $16,000 per year in interest (but remember the dot-com bust and the real estate bubble).
  • Your unpaid deposit is more than you can afford to pay back, and you can afford to retire without crediting the redeposit service.

Now let's look at the case of an employee who transfers to FERS with eligibility for a CSRS annuity component. An employee with at least five years of creditable civilian CSRS service (not counting any service with CSRS Offset coverage) may make a deposit for refunded CSRS service that is included in the CSRS annuity component. An employee who was automatically given FERS coverage because he or she had less than five years of prior creditable civilian CSRS service (again, not counting any service with CSRS Offset coverage) can make a redeposit, but the service will be credited as FERS service in the computation of the retirement.

Regardless of when the service was performed, the redeposit is 1.3 percent of basic pay earned during the service, plus interest. Interest accrues annually on the outstanding balance on Dec. 31 of each year and is compounded annually until the outstanding balance is deposited. Interest is charged to the date of deposit or the start date of the annuity, whichever is earlier. 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: FERS
  • Dates of Service for Which CSRS Contributions Were Refunded: Jan. 1, 1975-Dec. 31, 1978 (that four-year period is not enough to be vested under CSRS, which requires 5 years of service)
  • Amount of Deposit: 1.3 percent (regardless of dates of service) x $55,000 (salary for the period of service) = $715
  • Interest on Deposit: $4,315
  • Total Unpaid Deposit: $5,030
  • Retirement Reduction: The service is not creditable in the retirement calculation and cannot be used for service credit towards eligibility unless the redeposit is paid. Here's the value of four years of service in this example: 1 percent x 4 years x $80,000 (high-three average salary) = $3,200 per year.

Bottom line: Pay $5,030 and receive a permanent increase of $3,200 per year to the retirement benefit. This increase in retirement also increases the base for annual cost of living adjustments and for survivor benefits.

Don't pay the redeposit if:

  • You are terminally ill.
  • You can invest $5,030 and earn more than $3,200 per year (yeah, right!).

Resources

Checklist

  • Office of Human Capital: Request a review of your federal service to find out if you have any service subject to a service 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 and to find out the exact amount owed and receive instructions for making the payment. This can be done at any time 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 redeposit 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 redeposit, since interest will continue to accrue until payment is made or until you retire. Make payments during your career or save enough money to pay the deposit in a lump sum at retirement.

 

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Federal News Radio on Mondays at 10 a.m. ET on WFED AM 1500 in the Washington-metro area. Archived shows are available on NITPInc.com.

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