Your pre-retirement questions answered, part 1  

Since I will be traveling over the next few weeks, I thought it might be a good idea to reach into my mailbag (email “bag” that is) and share some questions that have come from other federal employees who are planning for retirement. Sometimes it seems that the more you learn about getting ready for retirement, the more questions you have about getting ready for retirement. These questions range from the continuation of insurance to the basic retirement benefit under FERS/CSRS, as well as confusion about claiming Social Security and TSP distributions.  

FERS Basic Retirement Benefit 

Q. I hear people referring to the minimum retirement age of 62 and 57 and then sometimes it is called the full retirement age of 67. Was this for Social Security or FERS?  

Eligibility for the FERS Basic Retirement Benefit (aka government pension) is determined by your age and number of years of creditable service.  In some cases, you must have reached the Minimum Retirement Age to receive retirement benefits. The minimum retirement age for FERS is between 55 and 57. 

The full retirement age for Social Security is between 65 and 67. If you were born in 1957 or earlier, you’re already eligible for your full Social Security benefit. The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960 until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. Age 62 is the minimum age to claim Social Security retirement benefit. 

Q. If I retire at 57 with 35 years, any suggestions on dealing with the no COLA until age 62? 

A 35-year career should be enough to retire comfortably, but there are some variables to consider. Along with FERS delayed/diet COLAs, other considerations include: 

• Have you determined how much of your pre-retirement income that you will need to live comfortably in retirement?  Remember that you will have to allow for income tax and insurance withholdings from your retirement income.  Be sure that your retirement estimate includes these withholdings and allows for a reasonable estimate of federal and state (if applicable) taxes.  

• Will you be electing survivor benefits for a spouse?  Be sure to consider this reduction from your FERS benefit.  Also consider any benefits that might be payable to a former spouse.    
• Determine how much you will need to withdraw from your savings to supplement your FERS retirement benefit before and after age 62.  Have you planned for how you will manage your TSP withdrawals and investment allocation after you retire? 

• Do you have a plan for unexpected expenses?  The biggest could be future long-term care needs.   

Be sure to have enough money to cover your living expenses over those first five years of your retirement from ages 57 to 62, considering that there won’t be an increase in your government pension benefit to offset the impact of inflation added to your current costs.  

For example, if you can live on $5,000/month net income and your FERS Retirement with Supplement provides $3,500 of the total needed (after withholdings for taxes and insurance), then the rest will need to come from your TSP and any other retirement savings. You will need to add an additional $150/month to the $5,000 that you estimated to cover your income needs after the first year if inflation is at 3%($5,000 x 103% = $5,150). This additional need will compound with future inflation. For example, in the second year, you will need an additional $304 /month over the initial $5,000 estimate ($5,150 x 103% = $5,304), then $463 / month the third year ($5,304 x 103% = $5,463).   

If you can delay TSP withdrawals by going to work after retirement, this could be another solution. The next job doesn’t need to offer benefits such as health insurance since you will have that with your retirement.   

If you aren’t planning to go back to work, then the only other place to allow for inflation is by taking larger distributions from your retirement savings or to reduce your spending to offset the added need. Be sure that you have adequate savings in your TSP to be able to adjust your withdrawals each year without depleting your account too soon.   

It might be prudent to seek assurance from a fiduciary financial professional to be sure that it wouldn’t make more sense to continue to work a few more years to increase your FERS benefit and allow your savings to continue to compound.   

You will begin receiving COLAs after reaching age 62.  https://www.opm.gov/support/retirement/faq/cost-of-living-adjustments/  

Q. I would like more info on how the retirement date impacts your COLA.  

Let’s say that you retire on July 31, 2024, and you are either retiring under CSRS or FERS (under FERS, you must be 62 or older to receive the COLA in most cases).  Your retirement benefit would be the same dollar amount for August, September, October and November. On Dec. 1, 2024, you would receive 4/12 of the 2024 COLA.  This would be paid on Jan. 1, 2025 (this is your “December” payment). If you are retiring under FERS and you are, let’s say, 58 years old, you would not receive any COLA until the year that you reach age 62. Your payments would stay the same until then. Certain retirees, like disability, survivor, and other special provisions, have different COLA entitlement rules. 

Q. I have heard that retiring on the last day of the month is a good idea, how do pay periods figure into when to retire? Should a person retire at the end of a pay period as well?  

If you choose the end of the month that is also the end of a pay period (such as June 29, 2024, Nov. 30, 2024, Dec. 28, 2024, May 31, 2025, and Oct. 31, 2025, for most federal payroll systems, but not USPS), this means that your retirement will commence on the 1st day of the following month and you will earn your last leave accrual for working 80 hours for the last pay period.  If you retire at the end of the month that is not the end of the pay period, then your FERS retirement benefit will commence on the firstday of the following month, but your last leave accrual would be for the last full pay period that you completed. For example, if you decide to retire on Friday, Aug. 30 (or Saturday, Aug. 31), your last leave accrual would have been for leave period 16, which ends on Aug. 24. Under FERS, an immediate, voluntary retirement commences on the first day of the month following your retirement date.   

Q. I have heard that I can roll over my lump sum annual leave payment directly to an IRA so that I won’t have to pay tax on this money until it is withdrawn from the IRA. Is this true? 

Unfortunately, the lump sum annual leave payment is unpaid compensation, and it is taxable in the year that you receive this payment. You are not able to contribute to the TSP out of this payment and it cannot be transferred directly to an IRA without paying taxes on this payment.   

According to the IRS: If you're a federal employee and receive a lump-sum payment for accrued annual leave when you retire or resign, this amount will be included as wages on your Form W-2 for the year that you receive the payment. You can open and make contributions to a traditional IRA if you (or, if you file a joint return, your spouse) receives taxable compensation during the year. You can have a traditional IRA whether you are covered by any other retirement plan. However, you may not be able to deduct all your contributions if you or your spouse are covered by an employer retirement plan.  

If you resign from one agency and are reemployed by another agency, you may have to repay part of your lump-sum annual leave payment to the second agency. You can reduce gross wages by the amount you repaid in the same tax year in which you received it. Attach to your tax return a copy of the receipt or statement given to you by the agency you repaid to explain the difference between the wages on your return and the wages on your Forms W-2.   

Your total contributions to both your IRA and your spouse's IRA may not exceed your joint taxable income or the annual contribution limit on IRAs times two, whichever is less. It doesn't matter which spouse earned the income. 

Roth IRAs and IRA deductions have other income limits. See IRA Contribution Limits and IRA deduction limits. 

Q. Is it possible to receive a refund of my contributions from FERS that are deducted from my biweekly salary? 

If you leave your government job before becoming eligible for retirement: 

• you can ask that your retirement contributions be returned to you in a lump sum payment, you would use SF 3106, Application for a Return of FERS Retirement Deductions or 

• If you have at least five years of creditable service, you can wait until you are at retirement age to apply for monthly retirement benefit payments. This is called a deferred retirement.   

If an employee who is not eligible for an immediate retirement benefit when they separate from federal employment chooses to receive a refund of their FERS retirement contributions, then they have the following options: 

According to OPM, you can roll over 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 individual retirement account or other employee sponsored plan. Your choice will affect the amount of taxes you owe. 

• OPM is required to withhold federal income tax from taxable payments over $200 at the rate of 20%. However, you may choose to take all or part of these payments in a direct rollover to an individual retirement account or an employer-sponsored retirement plan that accepts rollovers. The taxable portion can be rolled over into the Thrift Saving Plan. If you make this election, we will not withhold the federal income tax from the taxable payments. 
• You can open an individual retirement account to receive a direct rollover. You must contact the individual retirement account sponsor to find out how to have your payment made to your account. If you are unsure of how to invest your money, you may wish to temporarily establish an account to receive the payment. However, you may wish to consider whether you may move any or all the monies to another account later without penalties or limitations. 

If you choose to have the payment made to you and it is over $200, it is subject to the 20% Federal income tax withholding. The payment is taxed in the year in which it is received unless within 60 days after receiving it, you roll it over to an individual retirement account or retirement plan that accepts roll overs. You can roll over up to 100% of the eligible distribution, including the 20% withholding. To do so, you must replace the 20% withholding within the 60-day period. You will be taxed on any amount that you do not roll over. For example, if you roll over only 80% of the distribution, you will be taxed on the remaining 20%. 

You can find more information about the taxation of payments from qualified retirement plans from the following Internal Revenue Service publications: 

IRS Publication 575, "Pension and Annuity Income", 

IRS Publication 590-A, "Contributions to Individual Retirement Arrangements (IRAs)", 

IRS Publication 721, "Tax Guide to U.S. Civil Service Retirement System Payments", and 

Form 4972, "Tax on Lump Sum Distributions". 

OPM will not withhold any amount for federal income tax if your total taxable lump sum is less than $200. We will request a rollover election when you are eligible for a payment of $200 or more.