If you have left, or are leaving federal service, before becoming eligible for retirement, you have a couple of options. First, you can ask to have your retirement contributions returned to you in a lump sum. Or, if you have at least 5 years of creditable service, you can wait until you’re at retirement age to apply for monthly benefit payments, known as a deferred retirement.
Generally, if you receive a refund of FERS deductions after the effective date of your FERS coverage, you can never redeposit the funds. Further, the calculation of your annuity benefit does not include the period covered by your refund.
However, if you fell under FERS on or after October 28, 2009, you may make a redeposit for your refunded FERS service. If this redeposit goes unpaid, your service is still used toward the average salary computation, just not the annuity benefit.
Transferred to FERS with CSRS Service
When you apply for a refund, OPM will refund all your retirement deductions under both FERS and CSRS. Unlike the FERS refund, you can pay back the amount of the CSRS deductions, plus interest, if you are later reemployed in federal service. When applying for the refund, you can specify that you only want a refund of CSRS deductions.
Procedure for Having Your Retirement Contributions Refunded
You must get an application from your personnel office, complete it and return it. If you no longer work in federal service, you can get the application from OPM’s website (SF 3106). If you have been separated for 30 days or less, this application can be submitted to your former personnel office. It must go directly to OPM if you’ve been separated for more than 30 days.
Interest and Taxability on Lump Sum Payments
FERS employees receive interest on the refund of those contributions if you worked more than a year. Interest is paid at the same rate as government securities. Interest for CSRS employees is included in the refund if you have more than 1 but less than 5 years of service. It is paid at 3 percent.
Retirement contributions aren’t taxable but the interest included in the payment is taxable.
Rollover of Refund to an IRA or Employee Sponsored Plan
You may rollover your lump sum payments representing your retirement contributions including voluntary contributions and applicable interest. An eligible payment can be paid either to you or directly to an IRA or another employee-sponsored plan. This choice will affect the amount of taxes you owe.
OPM is required to withhold federal income tax from any taxable payments over $200 at the rate of 20 percent. However, you may choose to take all or part of these payments in a direct rollover to an IRA or employee-sponsored retirement plan that accepts rollovers. The taxable portion can also be rolled over to a TSP. If this is what you choose to do, no federal income tax from your payments will be withheld.
If you choose to have a payment made to you that is over $200, the taxable portion is subject to 20 percent federal income tax withholding. The payment is taxed in the year in which it’s received unless you roll it over to an IRA or another plan within 60 days or receiving it. You are allowed to roll over up to 100 percent of the eligible distribution including the 20 percent withholding. You will be taxed on any amount not rolled over.