When a federal employee separates from civilian service, they have the option to withdraw their retirement contributions in a lump sum or choose a deferred annuity.
With a deferred annuity, after you separate, you wait until you meet the FERS/CSRS retirement age and service requirements then apply for your monthly annuity payments.
If you had a minimum of five years of federal civilian employment under either FERS or CSRS, a deferred annuity enables you to start collecting your retirement annuity at age 62.
When you separate from service, you can request your FERS/CSRS retirement contributions be returned to you in a lump-sum refund. However, choosing this option eliminates your right to collect a monthly retirement annuity for the period of service your refund covers.
Keep in mind, while you were employed by the federal government, your contributions were made with after-tax earnings. As a result your lump-sum payment will not be considered taxable income.
However, the total amount of interest that has accrued through your years of service is considered taxable income when you receive the lump sum. This is something to consider when you weigh the pros and cons of requesting a lump-sum payment.
Another option is to rollover your lump sum payment to an individual retirement account or another type of employer-sponsored retirement plan. The rollover can be paid directly to you or deposited directly to an individual retirement account that accepts rollovers.
What Happens When You’re Re-Employed?
If you’re re-employed by the federal government after you separate from service, you have the option of re-depositing your lump-sum refund plus interest into the federal retirement system. Keep in mind, your refunded service cannot be used in computing annuity benefits unless you pay back the refunded amount plus interest.
Before you make a final decision, check the OPM website to ensure you’re using the correct forms when separating from service.