Why your retirement check might be smaller than you think it’ll be.
I recently received an email requesting that I write a column describing the deductions from benefit checks that are common for retirees. The emailer wrote:
Some of my colleagues look at the gross figure of their retirement benefit, but don't realize that by the time you take out your deductions, the gross gets dwindled down.
Do you know the difference between something that will reduce your Civil Service Retirement System or Federal Employees Retirement System benefit and something that will be withheld from your retirement? It's important to know because the reductions will lower the income on which you'll pay taxes, but the withholdings are taken after taxes.
The possible reductions are different for CSRS and FERS. Let's look at CSRS reductions first, in the order in which they would reduce your retirement:
- Age: This reduction is only taken if the employee is taking early retirement under age 55 -- either voluntary or discontinued service.
- Deposit: This applies to unpaid deposits for service that was not subject to CSRS retirement deductions and was performed prior to Oct. 1, 1982. It is 10 percent of the unpaid deposit. Such reductions are fairly common for people hired in the 1960s or 1970s under a temporary appointment, or who have seasonal work or summer employment on their record.
- Survivor Benefit Election: This could be a reduction for a spousal benefit or an insurable interest survivor benefit election. It could be significant: The reduction for the maximum spousal survivor (providing your surviving spouse with a benefit equal to 55 percent of your unreduced retirement) is almost 10 percent of your CSRS benefit. An insurable interest election can be even higher, depending on the age difference between you and the person you are naming to receive the survivor annuity.
- Redeposit: A redeposit is the repayment of a refund of retirement contributions that occurs when an employee has a break in service and chooses to withdraw their CSRS retirement contributions. If your break in service was prior to March 1, 1991, there will be a reduction to your retirement if you decide not to repay refunded contributions. On the other hand, if you took a refund of retirement contributions for service that ended on or after March 1, 1991, this service would not be used towards your length of service in the retirement computation unless you pay back the refund with interest.
- Alternative Annuity: Another reduction would occur if you elect an Alternative Form of Annuity. This option is available to employees who retire on a nondisability retirement, but who have a life-threatening illness. This option allows a lump sum payment of retirement contributions in exchange for a reduced annuity.
- CSRS Offset: The annuities of a CSRS Offset employee are computed in the same manner as if covered under CSRS only. The benefit is reduced (that's where the "offset" comes in) when the retiree becomes eligible for Social Security -- usually at age 62 -- even if the individual does not apply for Social Security.
Here are the possible reductions to a FERS annuity in the order that they would apply:
- Age: Although a FERS annuity is not reduced for early retirement, there is an age reduction for employees who retire at their minimum retirement age with at least 10 years of service, but less than 30, or at age 60 or 61 with at least 10 years of service, but less than 20. This is referred to as an MRA+10 retirement. To avoid this reduction, employees can postpone receiving the retirement benefit until they reach the age where they would have no reduction.
- Survivor Benefit Election: This could be a reduction for a spousal benefit or an insurable interest survivor benefit election. As under CSRS, it could be significant: The reduction for the maximum spousal survivor benefit -- providing your surviving spouse with a benefit equal to 50 percent of your unreduced retirement -- is 10 percent of your FERS benefit. An insurable interest election can be much greater than a 10 percent reduction, depending on the age difference between you and the person you name to receive the survivor annuity.
- Alternative Annuity: As under CSRS, the Alternative Form of Annuity is available to employees who take nondisability retirement, but who have a life-threatening illness. This option allows a lump-sum payment of retirement contributions in exchange for a reduced annuity. The reduction is computed actuarially based on the age of the employee and the amount of money in his or her retirement account.
In addition to these reductions, there are other factors that could make your retirement smaller than you might expect under either CRSR or FERS. These include whether your service was intermittent, part-time, or simply not creditable toward retirement; and whether a former spouse was awarded part of your benefit in a divorce settlement.
Now that we've considered the permanent reductions to your annuity, let's look at the items that the Office of Personnel Management will withhold from your retirement benefit.
First, taxes. OPM will withhold federal income tax while your retirement is being processed and you are receiving interim retirement payments. OPM will make any necessary tax withholding adjustments when your retirement is finalized.
OPM will not withhold state income taxes while you are receiving interim retirement payments. New retirees might consider making quarterly tax payments to their state. Another option is to increase state income tax withholding from your spouse's salary -- or your own, if you're starting a second career. Keep in mind that you could be in interim retirement status for more than six months. If you wait to pay your back taxes until you file your return, you may have to pay a penalty. Not all states tax federal retirement benefits: here's state-by-state information.
Retirees do not pay FICA tax or the Medicare tax on retirement benefits.
You also will receive a portion of your reduced retirement tax-free that represents the contributions that you've made to CSRS or FERS throughout your career. OPM has a calculator to help you compute the tax-free portion of your retirement.
In addition to taxes, you'll also have money withheld from your retirement for various forms of insurance, depending on the benefits you've chosen to receive:
- Federal Employees Health Benefits Program and Federal Employees Group Life Insurance: You will be notified at retirement that your FEHBP and FEGLI coverage will be transferred to OPM and will follow you automatically into retirement. As long as you are eligible to maintain these benefits, you don't need to do anything after you retire. You will need to decide how you wish your FEGLI coverage to continue when you complete your retirement application. Your health and life insurance coverage will continue while you are receiving interim pay while your retirement application is being processed. OPM will begin withholding health and life insurance premiums retroactive to the date you begin to receive your annuity, when the agency finishes processing your application.
- Federal Employees Dental and Vision Insurance Program: You shouldn't need to take any action with your FEDVIP plan when you retire. You will receive a letter informing you that plan administrators have been notified of your retirement and that your premiums will be deducted from your annuity once your retirement has been finalized. While you are receiving interim retirement checks, you may receive direct bills for your premium.
- Federal Long-Term Care Insurance Program: Contact Long Term Care Partners at 800-LTC-FEDS if you have your long term care insurance premiums withheld from your salary and you are retiring. You have various billing options. Here's more information.
- Savings Bonds: After you retire, OPM no longer will withhold for savings bonds. Here's more information.
- Checking or Savings Allotments: These are voluntary deductions sent by direct deposit to a checking or savings account in your name. You may have up to two allotments, and the accounts must be maintained at a domestic financial institution. You must maintain at least $100 net annuity payment, and the allotments must be for a minimum of $50.
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 Mondays at 10 a.m. EDT on federalnewsradio.com, or on WFED AM 1500 in the Washington-metro area.
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