Memo: add narrative based upon publication 721 US Civil Service, publication 939 General Rule For Pensions and Annuities, 575 Pensions and Annuities
PART II RULES FOR RETIREES
This section is for retirees who retired on nondisability retirement. If you retired on
disability, see Part III, Rules for Disability Retirement and Credit for the Elderly or
the Disabled, later.
Annuity Statement. The statement you received when your CSRS or
FERS annuity was approved shows your total contributions to the retirement plan (your
cost) and the gross monthly rate of your annuity benefit. The gross monthly rate is the
amount you were to get after your annuity was adjusted for electing the survivor's annuity
and for electing the lump-sum payment under the alternative annuity option (if either
applied) but before income tax withholding, insurance premiums, etc., were deducted.
Your cost. If you are a retired employee, your monthly annuity
check contains an amount on which you have previously paid income tax. This amount
represents part of your contributions to the retirement plan. Even though you did not
receive the money that was contributed to the fund, it was includible in your gross income
for federal income tax purposes in the year it was taken out of your pay.
The cost of your annuity is the total of your contributions to the retirement plan. It
includes any deemed deposits and any deemed redeposits. See Deemed deposits and redeposits
under Alternative Annuity Option, later.
When your annuity starts, the Office of Personnel Management (OPM) will tell you what
this amount is.
Repayment of contributions plus interest. If you repaid to the
retirement plan contributions that you had withdrawn earlier, or if you paid into the plan
to receive full credit for service not subject to retirement deductions, the entire
repayment, including any interest, is a part of your cost. You cannot claim an interest
deduction for any interest payments. You cannot treat these payments as voluntary
contributions; they are considered regular employee contributions.
Recovering your cost tax free. How you figure the tax-free recovery of the cost of your
CSRS or FERS annuity depends on your annuity starting date.
• If your annuity starting date is before July 2, 1986, either the Three-Year Rule
(see Three-Year Rule, later under General Rule) or the General Rule would apply to your
annuity.
• If your annuity starting date is after July 1, 1986, and before November 19, 1996,
you must use the General Rule or the Simplified Method.
• If your annuity starting date is after November 18, 1996, you must use the
Simplified Method.
Under the General Rule or the Simplified Method, each of your monthly annuity payments
is made up of two parts: the tax-free part that is a return of your cost, and the taxable
balance. The tax-free part is a fixed dollar amount. It remains the same, even if your
annuity is increased. This rule applies as long as you receive your annuity. However, see
Exclusion limit, later.
General Rule. Under the General Rule, you figure the tax-free
part of each full monthly payment by applying an exclusion percentage to the initial gross
monthly rate of your annuity. The result is the tax-free part of each gross monthly
annuity payment. Figuring this percentage is complex and requires the use of actuarial
tables. These tables, as well as other information you need to figure the exclusion under
the General Rule, are in Publication 939, General Rule for Pensions and Annuities.
Simplified Method. Under the Simplified Method, you figure the
tax-free part of each full monthly payment by dividing your cost by a number of months
based on your age.
If your annuity starting date is after November 18, 1996, the number you divide by is
larger than the number used by those whose annuity starting date is earlier.
Changing the method. If your annuity starting date is after
July 1, 1986, but before November 19, 1996, you can change the way you figure the tax-free
recovery of your cost (from the General Rule to the Simplified Method, or the other way
around) by filing amended returns for all your tax years beginning with the year in which
you received your first annuity payment. You must use the same method for all years.
Generally, you can make the change only within 3 years after the due date of your return
for the year in which you received your first annuity payment (or, if later, within 2
years after the tax for that year was paid).
Annuity starting date. Your annuity starting date is important
in applying any of the rules to figure the tax on your annuity. The annuity starting date
is called the commencing date on the annuity statement. You should use this date to
determine which rule to use, and to make the computation under that rule.
If you retire from federal government service on a regular annuity, your annuity
starting date generally is the first day of the month after the month in which you retire.
However, if you work the first 3 days (or less) of a month and then retire under the CSRS,
your annuity starting date generally is the day after retirement. If you are involuntarily
separated from service for reasons other than misconduct or delinquency, your annuity
starting date is the day after separation from service.
If something delays payment of your annuity, such as a late application for retirement,
it does not affect the date your annuity begins to accrue or your annuity starting date.
Disability retirement. If you retired on disability, see Part
III, Rules for Disability Retirement and Credit for the Elderly or the Disabled, later in
this publication, to determine the date you will begin to report your disability payments
as an annuity.
Exclusion limit. If your annuity starting date is after 1986,
the total amount of annuity income that you (or the survivor annuitant) can exclude over
the years as a return of your cost may not exceed your total cost.
Example. Your annuity starting date is after 1986 and you exclude $100 a month under
the Simplified Method. If your cost is $12,000, the exclusion ends after 10 years (120
months). Thereafter, your entire annuity is taxable.
Annuity starting date before 1987. If your annuity starting
date was before 1987, you continue to take your monthly exclusion figured under the
General Rule or Simplified Method for as long as you receive your annuity. If you chose a
joint and survivor annuity, your survivor continues to take the survivor's exclusion
figured as of the annuity starting date. The total exclusion may be more than your cost.
Deduction of unrecovered cost. If your annuity starting date is
after July 1, 1986, and the cost of your annuity has not been fully recovered at your (or
the survivor annuitant's) death, a deduction is allowed for the unrecovered cost. The
deduction is claimed on your (or your survivor's) final tax return as a miscellaneous
itemized deduction (not subject to the 2%-of-adjusted-gross-income limit). If your annuity
starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost
at death.
Choosing a survivor annuity after retirement. If you retired
without a survivor annuity and began reporting your annuity under the Simplified Method,
do not change your tax-free monthly amount even if you later choose a survivor annuity.
If you retired without a survivor annuity and decided to report your annuity under the
General Rule, you must figure a new exclusion percentage if you later choose a survivor
annuity. To figure it, reduce your cost by the amount you previously recovered tax free.
Figure the expected return as of the date the reduced annuity begins. For details on the
General Rule, see Publication 939.
Canceling a survivor annuity after retirement. If you notify
the Office of Personnel Management (OPM) that your marriage has ended (by death, divorce,
or annulment), your annuity can be increased to remove the reduction for a survivor
benefit. The increased annuity does not change the cost recovery you figured at the
annuity starting date. The tax-free part of each annuity payment remains the same.
Simplified Method
If your annuity starting date is after November 18, 1996, you must use the Simplified
Method to figure the tax-free part of your CSRS or FERS annuity. You can choose to use
either the Simplified Method or the General Rule if your annuity starting date is after
July 1, 1986, but before November 19, 1996. You will probably find the Simplified Method
both simpler and more beneficial than the General Rule.
Table 1. Use Table 1, Simplified Method Worksheet, (near the end of this publication) to
figure your taxable annuity. Be sure to keep the completed worksheet; it will help you
figure your taxable amounts for later years.
Line 2. Your cost in the plan includes any deemed deposits or redeposits (explained later
under Alternative Annuity Option. ) If your annuity starting date was after November 18,
1996, and you chose the alternative annuity option, reduce your cost by the lump-sum
payment you received.
Line 3. In completing line 3, use your age at your last birthday before your annuity
starting date. If you received your first annuity payment in 1997 but your annuity
starting date was before November 19, 1996, do not enter the amount shown for your age on
the worksheet. Instead, enter:
• 300, if you were 55 or under,
• 260, if you were 56 - 60,
• 240, if you were 61 - 65,
• 170, if you were 66 - 70,
• 120, if you were 71 or older.
Line 6. If you retired before 1997, the amount previously recovered tax free that you must
enter on line 6 is the total amount from line 10 of last year's worksheet.
Example. Bill Kirkland, age 65, began receiving retirement benefits in January 1997 under
a joint and survivor annuity to be paid for the joint lives of Bill and his wife, Kathy.
He had contributed $24,700 to the plan and had received no distributions before the
annuity starting date. Bill is to receive a retirement benefit of $1,000 a month, and
Kathy is to receive a monthly survivor benefit of $500 upon Bill's death.
Bill must use the Simplified Method computation. He fills in the worksheet as follows:
Table 1. Simplified Method Worksheet
1. Enter the total annuity received this year. Also
add this amount to the total for Form 1040, line
16a, or Form 1040A, line 11a $12,000
2. Enter your cost in the plan at the annuity starting
date, plus any death benefit exclusion 24,700
NOTE:If you receive annuity payments in prior years,
skip line 3 and enter the amount from the line 4 of
last year's worksheet on line 4.
3. Age at annuity starting date: Enter:
55 and under 360
56-60 310
61-65 260
66-70 210
71 and over 160 260
4. Divide line 2 by line 3 95
5. Multiply line 4 by the number of months for which 1,140
this year's payments were made
NOTE: If your annunity starting date was before 1987,
enter the amount from line 5 on line 8 below.
Skip lines 6,7,10, and 11.
6. Enter any amounts previously recovered tax free in
years after 1986 0
7. Subtract line 6 from line 2 24,700
8. Enter the smaller of line 5 or line 7 1,140
9. Tax annuity for year. Subtract line 8 from
line 1. Enter the result, but not less than zero.
Also add this amount to the total for Form 1040,
line 16b, or Form 1040A, line 11b $10,860
NOTE: If your Form CSA 1099R shows a larger amount,
use the amount on line 9 instead.
10. Add lines 6 and 8 1,140
11. Balance of cost to be recovered. Subtract line
10 from line 2 $23,550
Bill's tax-free monthly amount is $95. (See line 4 of the worksheet.) If he lives to
collect more than 260 monthly payments, he will have to include in his gross income the
full amount of any annuity payments received after 260 payments have been made.
If Bill does not live to collect 260 monthly payments and his wife begins to receive
monthly payments, she will also exclude $95 from each monthly payment until 260 payments
(Bill's and hers) have been collected. If she dies before 260 payments have been made, a
miscellaneous itemized deduction (not subject to the 2%-of-adjusted-gross-income limit)
will be allowed for the unrecovered cost on her final income tax return.
General Rule
If your annuity starting date is before November 19, 1996, you could have chosen to use
the General Rule to figure the tax-free part of your CSRS or FERS annuity. If your annuity
starting date is before July 2, 1986, you could have made that choice only if you could
not use the Three-Year Rule (explained later).
Compared with simplified method. If you are able to use the Simplified Method (discussed
above), it will usually be easier to use than the General Rule. You usually will pay less
tax if you use it. The General Rule is not explained in this publication. If you want to
compare results using the two rules, get Publication 939.
Three-Year Rule. If your annuity starting date was before July 2, 1986, you probably had
to report your annuity using the Three-Year Rule. Under this rule, you excluded all the
annuity payments from income until you fully recovered your cost. After the cost was
recovered, all payments became fully taxable. You cannot use another rule to again exclude
amounts from income.
The Three-Year Rule was repealed for retirees who have an annuity starting date after July
1, 1986.
Alternative Annuity Option
If you are a nondisability retiree under either the Civil Service Retirement System (CSRS)
or the Federal Employees' Retirement System (FERS), you may be able to choose the
alternative annuity option. This option is generally available only to those with certain
life-threatening illnesses or other critical medical conditions. If you choose this
option, you will receive a lump-sum payment equal to your total regular contributions to
the retirement plan plus any interest that applies. Your monthly annuity is then reduced
by about 5 to 15 percent to adjust for this payment.
If you choose the alternative annuity option, the amount of the lump-sum payment is
usually fully taxable. However, it may have a non-taxable part in some cases. The
nontaxable part, if any, is that amount by which the payment exceeds the income on the
contract. The income on the contract is equal to the present value of the annuity contract
minus the contributions you made to the retirement system. To determine the present value
of the contract, call the IRS Actuarial Branch 3 at 202-622-7789 (not a toll-free call).
You can figure the nontaxable part of a lump-sum payment using the following worksheet.
1) Enter the total lump-sum payment $
2) Enter the present value of the contract $
3) Enter the investment in the retirement plan $
4) Income on the contract. Subtract line 3 from
line 2 $
5) Nontaxable part of the lump-sum payment.
Subtract line 4 from line 1. (if line 4 is more
than line 1,enter -0-.) $
Annuity starting date before November 19, 1996. If your annuity starting date was before
November 19, 1996, and you chose the alternative annuity option, different rules apply.
Under those rules, 85% to 95% of the payment amount equal to your contributions to the
retirement system is taxable. Figure the taxable part by using Table 2, Worksheet for
Lump-Sum Payment, near the end of this publication. Your annuity payments are partly
taxable under either the Simplified Method or the General Rule (as explained earlier).
Example. Fran Brown retired from the federal government on November 9, 1996, at age 55.
She was entitled to a regular annuity (without survivor benefit) of $1,000 a month if she
did not choose the alternative annuity option. Her annuity cost (the total of her
contributions to the plan) was $21,780. Accrued interest on these contributions totaled
$220.
Upon her retirement, Fran elected the alternative annuity option, reducing her monthly
annuity to $915. In 1997, she received the lump-sum payment of $22,000, which equaled her
contributions plus the interest that applied.
She figures the taxable part of her lump-sum payment as follows:
Table 2. Worksheet for Lump-Sum Payment
1) Largest original monthly annuity payment available(after
the reduction for a survivor benefit, if applicable) $ 1,000
2) Monthly annuity payment after election of lump-sum payment 915
3) Annuity reduction (subtract line 2 from line 1) 85
4) Lump-sum credit (contributions plus interest plus deemed
deposits or redeposits). Also include the result in the
total for line 16a, Form 1040, or line 11a, Form 1040A 22,000
5) The amount on line 4 minus interest 21,780
6) Divide line 3 by line 1 (round to 3 decimal places) .085
7) Tax-free portion of lump-sum payment (multiply line
5 by line 6) $ 1,851
8) Taxable portion of lump-sum credit (subtract line 7 from line 4).
Also include the result in the total for line 16b, Form 1040, or
line 11b, Form 1040A $ 20,149
In figuring the taxable part of her annuity payments, Fran must use the Simplified Method.
Under this rule, she divides her total cost ($21,780) by the number (360) for her age at
her annuity starting date from line 3 of Table 1. The result, $60.50, is her monthly
tax-free amount.
The total that Fran can exclude over the years is $21,780, which is made up of $1,851, the
tax-free part of her lump-sum credit, and $19,929, the tax-free part of her annuity
payments.
Rollovers. You can roll over the taxable part of the lump-sum payment to an IRA or a
qualified retirement plan. OPM must withhold income tax of 20% on the taxable part of the
payment unless you have OPM transfer that part directly to an IRA or a qualified
retirement plan. See Rollover Rules later in this part for more information.
If your contributions include a deemed deposit or redeposit, discussed later, OPM will
make a direct rollover only up to the net lump-sum payment amount. If the taxable amount
(line 8 of Table 2, Worksheet for Lump-Sum Payment) is more than your net lump-sum
payment, you can roll over the difference using your own funds within 60 days. If you do
not roll over this difference, you must include it as taxable income on your income tax
return.
5- or 10-year tax option or capital gain treatment. Your lump-sum payment does not qualify
for the 5- or 10-year tax option or capital gain treatment. Do not report any lump-sum
payment or any interest on Form 4972, Tax on Lump-Sum Distributions. This form is used to
elect these optional methods. For more information, get Publication 575.
Where to report. As stated on the worksheet, add any actual or deemed payment of your
lump-sum credit to the total for line 16a, Form 1040, or line 11a, Form 1040A. Add the
taxable portion to the total for line 16b, Form 1040, or line 11b, Form 1040A, unless you
roll over the taxable portion to an IRA or a qualified retirement plan. Include any
interest paid with the second installment on line 8a.
Additional tax. If you retired before the calendar year in which you reach age 55, you
must pay an additional tax equal to 10% of the taxable amount of the lump-sum payment that
you do not roll over to an IRA or a qualified retirement plan. Report the additional tax
on line 50, Form 1040. You may also have to complete Form 5329, Additional Taxes
Attributable to Qualified Retirement Plans (Including IRAs), Annuities, Modified Endowment
Contracts, and MSAs and attach it to your Form 1040. If you do not have to attach Form
5329, write "No" on the dotted line next to line 50 of your Form 1040.
The 10% additional tax does not apply to the taxable amount of the lump-sum payment that
is equal to your deductible medical expenses for the year (after reduction by 7 1/2% of
your adjusted gross income), even if you do not itemize deductions.
Deemed deposits and redeposits. Your lump-sum credit is the sum of your contributions to
the retirement system, interest on those contributions, and any deemed deposits and deemed
redeposits. Deemed deposits (including interest) are for federal employment during which
no retirement contributions were taken out of your pay. Deemed redeposits (including
interest) are for any refunds of retirement contributions that you received but have not
repaid. You will get credit for this prior service without actually making these deposits
or redeposits. Your reduced (alternative) annuity will be figured as though, before
retirement, you had made these deposits and redeposits to OPM. The lump-sum payment
actually made to you will not include these amounts.
Lump-sum payment in installments. If you choose the alternative annuity option, you
usually will receive the lump-sum payment in two equal installments. You will receive the
first installment after you make the choice upon retirement. The second installment will
be paid to you, with interest, in the next calendar year. (Exceptions to the installment
rule are provided for cases of critical medical need.)
Even though the lump-sum payment is made in installments, the overall tax treatment
(explained at the beginning of this discussion) is the same as if the whole payment were
paid at once.
If the payment has a nontaxable part, you must treat the taxable part (the income on the
contract) as received first. (See the earlier discussion for computation of the taxable
and nontaxable parts.) You can figure the nontaxable part of each installment using the
following worksheet.
1)Enter the nontaxable part of the lump-sum payment $
2)Enter the first installment $
3)Enter the income on the contract $
4)Nontaxable part of the first installment.Subtract
line 3 from line 2. (If line 3 is more than line 2,
enter -0-.) $
5)Nontaxable part of the second installment.
Subtract line 4 from line 1. $
Annuity starting date before November 19, 1996. In this case, the tax-free percentage of
each installment is the same as would apply to the lump-sum payment as a whole. The
tax-free amount of the first installment is 50% of the tax-free portion on line 7 of your
Worksheet for Lump-Sum Payment. Likewise, the tax-free amount of the second installment is
50% of the amount on line 7. The balance of each installment payment is taxable, including
the interest on the second installment.
If you have deemed deposits or deemed redeposits (discussed earlier), your lump-sum
payment is reduced. This will affect the tax-free amount of each installment, as shown in
the following example.
Example. Your unadjusted lump-sum credit was $20,000. Your payment, however, was reduced
by a $2,000 deemed redeposit of contributions that had been previously refunded to you.
You were therefore entitled to an $18,000 lump-sum payment. Half of this, or $9,000, was
paid to you as the first installment. The remaining $9,000 was paid in the second
installment.
You are considered to have received the $2,000 redeposit with the first installment,
making a total of $11,000 ($9,000 plus $2,000). This is 55% of the total $20,000 lump-sum
credit (instead of 50%). Apply this 55% to the tax-free amount of the total lump-sum
credit (from line 7 of your Worksheet for Lump-Sum Payment). The result is the tax-free
part of the first installment. The remaining 45% of the tax-free amount of the total
lump-sum credit is the tax-free part of the second installment.
Federal Gift Tax
If, through the exercise or nonexercise of an election or option, you provide an annuity
for your beneficiary at or after your death, you have made a gift. The gift may be taxable
for gift tax purposes. The value of the gift is equal to the value of the annuity.
Joint and survivor annuity. If the gift is an interest in a joint and survivor annuity
where only you and your spouse can receive payments before the death of the last spouse to
die, the gift will generally qualify for the unlimited marital deduction. This will
eliminate any gift tax liability with regard to that gift.
If you provide survivor annuity benefits for someone other than your current spouse, such
as your former spouse, the unlimited marital deduction will not apply. This may result in
a taxable gift.
More information. For information about the gift tax, see Publication 950, Introduction to
Estate and Gift Taxes.
Retirement During the Past Year
If you have recently retired, the following discussions covering annual leave, voluntary
contributions, and community property may apply to you.
Annual leave. Treat a payment for accrued annual leave received on retirement as a salary
payment. It is taxable as wages in the tax year you receive it.
Voluntary contributions. Voluntary contributions to the retirement fund are those made in
addition to the regular contributions that were deducted from your salary. They also
include the regular contributions withheld from your salary after you have the years of
service necessary for the maximum annuity allowed by law. Voluntary contributions are not
the same as employee contributions to the Thrift Savings Plan. See Thrift Savings Plan,
later.
Additional annuity benefit. If you choose an additional annuity benefit from your
voluntary contributions, it is treated separately from the annuity benefit that comes from
the regular contributions deducted from your salary. This separate treatment applies for
figuring the amounts to be excluded from, and included in, gross income. It does not
matter that you receive only one monthly check covering both benefits. Each year you will
receive Form CSA 1099R, Statement of Annuity Paid, that will show how much of your total
annuity received in the past year was from each type of benefit.
Figure the taxable and tax-free parts of your additional monthly benefits from voluntary
contributions using the rules that apply to regular CSRS and FERS annuities, as explained
earlier in Part II.
Refund of voluntary contributions. If you choose a refund of your voluntary contributions
plus accrued interest, the interest is taxable to you in the tax year it is distributed
unless you roll it over to an IRA or a qualified retirement plan. See Rollover Rules,
later. The interest does not qualify for the 5- or 10-year tax option.
Example. You retired in November when you reached the necessary age and years of service
to retire. You applied for an annuity based on your regular contributions to the plan. You
chose a refund of your voluntary contributions plus interest.
On December 15, you received the refund. The interest is fully taxable (no 5- or 10-year
tax option treatment is allowed) unless you roll it over to an IRA or a qualified
retirement plan within 60 days.
Additional tax. The accrued interest included in the refund of voluntary contributions and
not rolled over into an IRA or a qualified retirement plan is generally subject to a 10%
additional tax on early distributions if the refund is made to you before the date you
reach age 59 1/2. However, the tax does not apply if the refund is made after your
retirement and you retired during or after the calendar year in which you reached age 55.
Also, the 10% additional tax does not apply if you retired at any age because of total and
permanent disability. Nor does the additional tax apply to the accrued interest that is
equal to your deductible medical expenses for the year (after reduction by 7 1/2% of your
adjusted gross income), even if you do not itemize deductions.
Report the additional tax on line 50, Form 1040. You may also have to complete Form 5329
and attach it to your Form 1040. If you do not have to attach Form 5329, write
"No" on the dotted line next to line 50 of your Form 1040.
Community property laws. State community property laws apply to your annuity. This will
affect your income tax if you file a separate return from your spouse.
Generally, the determination of whether your annuity is separate income (taxable to you)
or community income (taxable to both you and your spouse) is based on your marital status
and domicile when you were working. Regardless of whether you are now living in a
community property state or a noncommunity property state, your current annuity may be
community income if it is based on services you performed while married and domiciled in a
community property state.
At any time, you have only one domicile even though you may have more than one home. Your
domicile is your fixed and permanent legal home to which, when absent, you intend to
return. The question of your domicile is mainly a matter of your intentions as indicated
by your actions.
If your annuity is a mixture of community income and separate income, you must divide it
between the two kinds of income. The division is based on your periods of service and
domicile in community and noncommunity property states while you were married.
For more information, see Publication 555, Community Property.
Reemployment After Retirement
If you retired from federal service and were later reemployed by the federal government,
you can continue to receive your annuity during reemployment. Your annuity will continue
to be taxed just as it was before. If you are still recovering your cost, you continue to
do so. If you have recovered your cost, the annuity you receive while you are reemployed
is generally fully taxable. The employing agency will pay you the difference between your
salary for your period of reemployment and your annuity. This amount is taxable as wages.
Nonresident Aliens
There are some special rules for nonresident alien federal employees performing services
outside the United States and for nonresident alien retirees and beneficiaries.
Special rule for figuring your total contributions. Your contributions to the retirement
plan (your cost) also include the government's contributions to the plan to a certain
extent. You include government contributions that would not have been taxable to you at
the time they were contributed if they had been paid directly to you. For example,
government contributions would not have been taxable to you if, at the time made, your
services were performed outside the United States. Thus, your cost is increased by
government contributions that you would have excluded as income from foreign services if
you had received them directly as wages. This reduces the benefits that you, or your
beneficiary, must include in income.
This method of figuring your total contributions does not apply to any contributions the
government made on your behalf after you became a citizen or resident of the United
States.
Limit on taxable amount. There is a limit on the distributions paid to a nonresident alien
retiree or nonresident alien beneficiary that must be included in income. The taxable part
of each monthly payment is figured using the following worksheet:
Worksheet for Nonresident Alien Retiree or Beneficiary
1)Portion of monthly annuity otherwise taxable $
2)Total basic pay for services for the United States $
3)Total basic pay minus part that was nontaxable as being
from sources outside the United States $
4)Taxable part of monthly annuity
[((3) / (2)) X (1)] $
Basic pay. Basic pay includes your regular pay plus any standby differential. It does not
include bonuses, overtime pay, certain retroactive pay, uniform or other allowances, or
lump-sum leave payments.
Example 1. You are a nonresident alien who had performed all services for the United
States abroad as a nonresident alien. You retired and began to receive a monthly annuity
of $200. Your combined basic pay for all services for the United States was $100,000.
Without regard to the limit explained above, you would have had to include $60 of each
monthly annuity payment in your gross income. Since you are a nonresident alien, the
taxable part of each monthly payment after use of the limit is figured as follows:
Worksheet for Nonresident Alien Retiree or Beneficiary
1)Portion of monthly annuity otherwise taxable $ 60
2)Total basic pay for services for the United States $100,000
3)Total basic pay minus part that was nontaxable as
being from sources outside the United States $ 0
4)Taxable part of monthly annuity
[((3) / (2)) X (1)]
[($0 / $100,000) X $60] $ 0
Example 2. You are a nonresident alien who retired from your employment with the United
States. For your work performed both within the United States and abroad you began to
receive a monthly annuity of $240.
Your total basic pay for your services for the United States was $120,000; $80,000 was for
work done in the United States, and $40,000 was for your work done in a foreign country.
You were a nonresident alien during all of your employment.
Under the rules that would otherwise apply to your annuity, you would have had to include
$165 of each monthly payment in your gross income. Applying the limit based on your
present rate of annuity the taxable part of each monthly payment is figured as follows:
Worksheet for Nonresident Alien Retiree or Beneficiary
1)Portion of monthly annuity otherwise taxable $ 165
2)Total basic pay for services for the United States $ 120,000
3)Total basic pay minus part that was nontaxable
as being from sources outside the United States.
($120,000 - $40,000) $ 80,000
4)Taxable part of monthly annuity [((3) / (2)) X (1)]
[($80,000 / $120,000) X $165] $ 110
Thrift Savings Plan
All of the money in your Thrift Savings Plan (TSP) account is taxed as ordinary income
when you receive it. This is because neither the contributions to your TSP account nor its
earnings have been previously included in your taxable income. The way that you withdraw
your account balance determines when you must pay the tax.
Direct rollover by the TSP. If you ask the TSP to transfer any part of the money in your
account to an individual retirement arrangement (IRA) or other qualified retirement plan,
the tax on that part is deferred until you receive payments from the IRA or other plan.
See Rollover Rules, later.
TSP annuity. If you ask the TSP to buy an annuity with the money in your account, the
annuity payments are taxed when you receive them. However, the payments are not subject to
the tax on early distributions, even if you are under age 55 when they begin.
Cash withdrawals. If you withdraw any of the money in your TSP account, it is taxed as
ordinary income when you receive it unless you roll it over into an IRA or other qualified
plan. (See Rollover Rules, later.) If you receive your entire TSP account balance in a
single tax year, you may be able to use the 5- or 10-year tax option to figure your tax.
See Lump-Sum Distributions in Publication 575 for details.
If you receive a single payment or payments over a period of less than 10 years, the TSP
must withhold 20% for federal income tax. If you receive payments over a period of 10 or
more years or a period based on your life expectancy, they are subject to withholding
under the same rules as your CSRS or FERS annuity. See Tax Withholding and Estimated Tax
in Part I.
Tax on early distributions. If you separate from government service before the calendar
year in which your reach age 55, any money paid to you from your TSP account before you
reach age 59 1/2 is generally subject to an additional 10% tax on early distributions.
Report the tax on line 50 of Form 1040. You may also have to file Form 5329. For details,
see the Form 1040 instructions for line 50.
This additional tax does not apply in the following situations:
1) You receive a series of payments based on your life expectancy, or
2) You retire on disability.
Also, this tax does not apply to the amount of payments you receive equal to your medical
expenses for the year, minus 7.5% of your adjusted gross income.
Outstanding loan. If the TSP declares a distribution from your account because money you
borrowed has not been repaid when you separate from government service, your account is
reduced and the amount of the distribution (your unpaid loan balance and any unpaid
interest) is taxed in the year declared. The distribution also may be subject to the
additional 10% tax on early distributions. However, the tax will be deferred if you make a
rollover contribution to an IRA or other qualified plan equal to the declared distribution
amount. See Rollover Rules, next. If you withdraw any money from your TSP account the same
year, the TSP must withhold income tax of 20% of the total of the declared distribution
and the amount withdrawn.
More information. For more information about the TSP, see Summary of the Thrift Savings
Plan for Federal Employees, distributed to all federal employees. Also see Important Tax
Information About Payments From Your Thrift Savings Plan Account, which is available from
your agency personnel office or from the TSP.
Rollover Rules
A rollover is a tax-free withdrawal of cash or other assets from one qualified retirement
plan or IRA and its reinvestment in another qualified retirement plan or IRA. You do not
include the amount rolled over in your income, and you cannot take a deduction for it. The
amount rolled over is taxable later as the new program pays that amount to you. If you
roll over amounts into an IRA, subsequent distributions of these amounts from the IRA do
not qualify for the capital gain or the 5- or 10-year tax option. Capital gain treatment
or the 5- or 10-year tax option will be regained if the IRA contains only amounts rolled
over from a qualified plan and these amounts are rolled over from the IRA into a qualified
retirement plan.
A qualified retirement plan is a qualified pension, profit-sharing, or stock bonus plan,
or a qualified annuity plan. The CSRS, the FERS, and the TSP are considered qualified
retirement plans.
Distributions eligible for rollover treatment. If you receive a refund of your CSRS or
FERS contributions when you leave government service, you can roll over any interest you
receive on the contributions. You cannot roll over any part of your CSRS or FERS annuity
payments.
You can roll over a distribution of any part of your TSP account balance except:
1) Any of a series of substantially equal distributions paid at least once a year
over:
a) Your life or life expectancy,
b) The joint lives or life expectancies of you and your beneficiary, or
c) A period of 10 years or more,
2) A required minimum distribution generally beginning at age 70 1/2, or
3) A declared distribution because of an unrepaid loan, if you have not separated from
government service (see Outstanding Loan under Thrift Savings Plan, earlier).
In addition, a distribution to your beneficiary generally is not treated as an eligible
rollover distribution. However, see Qualified domestic relations order and Rollover by
surviving spouse, later.
Direct rollover option. You can choose to have the OPM or TSP transfer any part of an
eligible rollover distribution directly to another qualified retirement plan that accepts
rollover distributions or to an IRA.
No tax withheld. If you choose the direct rollover option, no tax will be withheld from
any part of the distribution that is directly paid to the trustee of the other plan.
Payment to you option. If an eligible rollover distribution is paid to you, the OPM or TSP
must withhold 20% for income tax even if you plan to roll over the distribution to another
qualified retirement plan or IRA. However, the full amount is treated as distributed to
you even though you actually receive only 80%. You must include in income any part
(including the part withheld) that you do not roll over within 60 days to another
qualified retirement plan or to an IRA.
If you leave government service before the calendar year in which you reach age 55 and are
under age 59 1/2 when a distribution is paid to you, you may have to pay an additional 10%
tax on any part, including any tax withheld, that you do not roll over. See Tax on Early
Distributions in Publication 575.
Exception to withholding. Withholding from an eligible rollover distribution paid to you
is not required if the distributions for your tax year total less than $200.
Partial rollovers. If you receive a lump-sum distribution, it may qualify for capital gain
treatment or the 5- or 10-year tax option. See Lump-Sum Distributions in Publication 575.
If you roll over any part of the distribution, the part you keep does not qualify for this
special tax treatment.
Rolling over more than amount received. If you want to roll over more of an eligible
rollover distribution than the amount you received after income tax was withheld, you will
have to add funds from some other source (such as your savings or borrowed amounts).
Example. You left government service at age 53. On January 31, 1998, you receive an
eligible rollover distribution of $10,000 from your TSP account. The TSP withholds $2,000,
so you actually receive $8,000. If you want to roll over the entire $10,000 to postpone
including that amount in your income, you will have to get $2,000 from some other source
and add it to the $8,000 you actually received. You must complete the rollover by April 1,
1998.
If you roll over only $8,000, you must include in your 1998 income the $2,000 not rolled
over. Also, you may be subject to the 10% additional tax on the $2,000.
Time for making rollover. You must complete the rollover of an eligible rollover
distribution by the 60th day following the day on which you receive the distribution.
Frozen deposits. If an amount that was distributed to you is deposited in an account from
which you cannot withdraw it because of either:
1) The bankruptcy or insolvency of any financial institution, or
2) Any requirement imposed by the state in which the institution is located because of the
bankruptcy or insolvency (or threat of it) of one or more financial institutions in the
state,
that amount is considered a "frozen deposit" for the period during which you
cannot withdraw it.
A special rule extends the period allowed for a tax-free rollover for frozen deposits. The
period during which the amount is a frozen deposit is not counted in the 60-day period
allowed for a tax-free rollover to a qualified plan or an IRA. Also, the 60-day period
does not end earlier than 10 days after the deposit is no longer a frozen deposit. To
qualify under this rule, the deposit must be frozen on at least one day during the 60-day
rollover period.
Qualified domestic relations order. You may be able to roll over tax free all or part of a
distribution you receive from the CSRS, the FERS, or the TSP under a court order in a
divorce or similar proceeding. You must receive the distribution as the government
employee's spouse or former spouse (not as a nonspousal beneficiary). The rollover rules
apply to you as if you were the employee. You can roll over the distribution if it is an
eligible rollover distribution (described earlier) and it is made under a qualified
domestic relations order (QDRO) or, for the TSP, a qualifying order.
A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or
marital property rights. The payments must be made to a spouse, former spouse, child, or
other dependent of a participant in the plan. For the TSP, a QDRO can be a qualifying
order, but a domestic relations order can be a qualifying order even if it is not a QDRO.
For example, a qualifying order can include an order that requires a TSP payment of
attorney's fees to the attorney for the spouse, former spouse, or child of the
participant.
The order must contain certain information, including the amount or percentage of the
participant's benefits to be paid to each payee. It cannot change the amount or form of
the plan's benefits.
A distribution that is paid to a child, dependent, or, if applicable, an attorney for
fees, under a QDRO or a qualifying order is taxed to the plan participant.
Rollover by surviving spouse. You may be able to roll over tax free all or part of the
CSRS, FERS, or TSP distribution you receive as the surviving spouse of a deceased
employee. The rollover rules apply to you as if you were the employee, except that you can
roll over the distribution only into an IRA. You cannot roll it over into a qualified
retirement plan. A distribution paid to a beneficiary other than the employee's surviving
spouse is not an eligible rollover distribution.
You cannot roll over into an IRA any part of the distribution to which you apply the death
benefit exclusion.
How to report. On your Form 1040, report the total distributions from the CSRS, FERS, or
TSP on line 16a. Report the taxable amount of the distributions minus the amount rolled
over, regardless of how the rollover was made, on line 16b. If you file Form 1040A, report
the total distributions on line 11a and the taxable amount minus the amount rolled over on
line 11b.
Written explanation to recipients. The TSP or OPM must provide a written explanation to
you within a reasonable period of time before making an eligible rollover distribution to
you. It must tell you about:
1) Your right to have the distribution paid tax free directly to another qualified
retirement plan or to an IRA,
2) The requirement to withhold tax from the distribution if it is not paid directly to
another qualified retirement plan or to an IRA,
3) The nontaxability of any part of the distribution that you roll over to another
qualified retirement plan or to an IRA within 60 days after you receive the
distribution, and
4) If they apply, the other qualified retirement plan rules, including those for
lump-sum distributions, alternate payees, and cash or deferred arrangements.
Reasonable period of time. The TSP or OPM must provide you with a written explanation no
earlier than 90 days and no later than 30 days before the distribution is made. However,
you can choose to have a distribution made less than 30 days after the explanation is
provided as long as the following two requirements are met.
1) You must have the opportunity to consider whether or not you want to make a
direct rollover for at least 30 days after the explanation is provided.
2) The information you receive must clearly state that you have the right to have
30 days to make a decision.
Contact the TSP or OPM if you have any questions about this information.
Choosing the right option. The following comparison chart may help you decide which
distribution option to choose. Carefully compare the tax effects of each and choose the
option that is best for you.
Comparison Chart
Direct Rollover Payment To You
No withholding. Payer must withhold income tax of 20% on the taxable
part even if you roll it over to another plan
or to an IRA.
No 10% additional If you are under age 59 1/2, a 10% additional tax
tax. may apply to the taxable part, including the tax
withheld, that you do not roll over.
Not income until Taxable part, including the tax withheld,
later distributed is income if not rolled over.
to you from the
other plan or
the IRA.
Not eligible for May be eligible for capital gain treatment
capital gain or or the 5- or 10-year tax option if no part
5- or 10-year is rolled over.
tax option.
*May be eligible for capital gain treatment or the 5- or 10-year tax
option when later distribution to you from the plan that
accepts the rollover.
How To Report Benefits
If you received annuity benefits that are not fully taxable, report the total received for
the year on Form 1040, line 16a, or on Form 1040A, line 11a. Also include on that line the
total of any other pension plan payments (even if fully taxable, such as those from the
Thrift Savings Plan) that you received during the year in addition to the annuity. Report
the taxable amount of these total benefits on line 16b (Form 1040) or line 11b (Form
1040A). If you use Form 4972, Tax on Lump-Sum Distributions, however, to report the tax on
any amount, do not include that amount on lines 16a and 16b or lines 11a and 11b; follow
the Form 4972 instructions.
If you received only fully taxable payments from your retirement, the Thrift Savings Plan,
or other pension plan, report on Form 1040, line 16b, or Form 1040A, line 11b, the total
received for the year (except for any amount reported on Form 4972); no entry is required
on line 16a (Form 1040) or line 11a (Form 1040A).
