Publication 721 |
2000 Tax Year |
Part II Rules for Retirees
This part of the publication 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 from OPM when your CSRS or FERS annuity
was approved shows the commencing date (the annuity
starting date), the gross monthly rate of your annuity
benefit, and your total contributions to the retirement
plan (your cost). You will use this information to figure the tax-free
recovery of your cost.
Annuity starting date.
If you retire from federal government service on a regular annuity,
your annuity starting date is the "commencing date " on your
annuity statement from OPM. 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.
Gross monthly rate.
This is the amount you were to get after any adjustment for
electing a survivor's annuity or for electing the lump-sum payment
under the alternative annuity option (if either applied) but before
any deduction for income tax withholding, insurance premiums, etc.
Your cost.
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 plan, it was included in your
gross income for federal income tax purposes in the years it was taken
out of your pay.
The cost of your annuity is the total of your contributions to the
retirement plan, as shown on your annuity statement from OPM. If you
elected the alternative annuity option, it includes any deemed
deposits and any deemed redeposits that were added to your lump-sum
credit. (See Lump-sum credit under Alternative Annuity
Option, later.)
If you repaid contributions that you had withdrawn from the
retirement plan 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 or the General Rule (both discussed later) applies
to your annuity.
- If your annuity starting date is after July 1, 1986, and
before November 19, 1996, you could have chosen to use either the
General Rule or the Simplified Method.
- If your annuity starting date is after November 18, 1996,
you must use the Simplified Method.
Under both the General Rule and 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 part that is the amount
of each payment that is more than the part that represents your cost.
The tax-free part is a fixed dollar amount. It remains the same, even
if your annuity is increased. Generally, this rule applies as long as
you receive your annuity. However, see Exclusion limit,
later.
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 from the Simplified Method to the General Rule. However, you must
use the same method for all years. To do this, you must file amended
returns (showing the change) for all previous tax years, beginning
with the year in which you received your first annuity payment.
Generally, you must make this change before the later of:
- 3 years after the due date of the return for the year in
which you received your first annuity payment, or
- 2 years after the tax for that year was paid.
Choosing a survivor annuity after retirement.
If you retired without a survivor annuity and report 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 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 OPM that your marriage has ended, your annuity might
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.
For more information about choosing or canceling a survivor annuity
after retirement, contact OPM's Retirement Information Office at
1-888-767-6738 (in the metropolitan Washington, D.C. area, call
202-606-0500), or call Annuitant Express at 1-800-409-6528.
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.
Annuity payments you or your survivors receive after the total cost in
the plan has been recovered are fully taxable.
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 is 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 that same
exclusion. 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 limit on 2%
of adjusted gross income). If your annuity starting date is before
July 2, 1986, no tax benefit is allowed for any unrecovered cost at
death.
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. (OPM has figured the taxable amount of your annuity
shown on your Form CSA 1099R using the Simplified Method.) You could
have chosen 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. The Simplified Method does not apply if your annuity
starting date is before July 2, 1986.
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. This number will differ depending on whether your annuity
starting date is on or before November 18, 1996, or later. If your
annuity starting date is after 1997 and your annuity includes a
survivor benefit for your spouse, this number is based on your
combined ages.
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.
Instead of Table 1, you can generally use the Simplified Method
Worksheet in the instructions for Form 1040 or Form 1040A to figure
your taxable annuity. However, you must use Table 1 and
Table 2 in this publication if you chose the alternative annuity
option. See Alternative Annuity Option, later.
Line 2.
See the discussion at the beginning of this Part II for an
explanation of your cost in the plan. If your annuity starting date is
after November 18, 1996, and you chose the alternative annuity option
(explained later), you must reduce your cost by the tax-free part of
the lump-sum payment you received.
Line 3.
Find the appropriate number from one of the tables at the bottom of
the worksheet. If your annuity starting date is after 1997, use:
- Table 1 for an annuity without a survivor
benefit, or
- Table 2 for an annuity with a survivor benefit.
If your annuity starting date is before 1998, use Table 1.
Line 6.
If you retired before 2000, 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. If your annuity starting date is before
November 19, 1996, and you chose the alternative annuity option, it
includes the tax-free part of the lump-sum payment you received.
Example.
Bill Kirkland retired from the federal government on April 30,
2000, under an annuity that will provide a survivor benefit for his
wife, Kathy. His annuity starting date is May 3, 2000. He must use the
Simplified Method to figure the tax-free part of his annuity benefits.
Bill's monthly annuity benefit is $1,000. He had contributed
$24,700 to his retirement plan and had received no distributions
before his annuity starting date. At his annuity starting date, he was
65 and Kathy was 57.
Bill's completed worksheet (Table 1) is shown on the next page. To
complete line 3, he used Table 2 at the bottom of the worksheet and
found the number in the second column opposite the age range that
includes 122 (his and Kathy's combined ages). Bill keeps a copy of the
completed worksheet for his records. It will help him (and Kathy, if
she survives him) figure the taxable amount of the annuity in later
years.
Bill's tax-free monthly amount is $80. (See line 4 of the
worksheet.) If he lives to collect more than 310 monthly payments, he
will have to include in his gross income the full amount of any
annuity payments received after 310 payments have been made.
If Bill does not live to collect 310 monthly payments and his wife
begins to receive monthly payments, she will also exclude $80 from
each monthly payment until 310 payments (Bill's and hers) have been
collected. If she dies before 310 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.
Bill's Simplified Method
General Rule
If your annuity starting date is after November 18, 1996, you
cannot use the General Rule to figure the tax-free part of your CSRS
or FERS annuity. If your annuity starting date is after July 1, 1986,
but before November 19, 1996, you could have chosen to use either the
General Rule or the Simplified Method. If your annuity starting date
is before July 2, 1986, you could have chosen to use the General Rule
only if you could not use the Three-Year Rule.
Under the General Rule, you figure the tax-free part of each full
monthly payment by multiplying the initial gross monthly rate of your
annuity by an exclusion percentage. Figuring this percentage is
complex and requires the use of actuarial tables. For these tables and
other information about using the General Rule, see 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 whose annuity
starting date is after July 1, 1986.
Alternative Annuity Option
If you are a nondisability retiree under either CSRS or FERS, you
may be able to choose the alternative annuity option. This option is
generally available only to retirees 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.
Lump-Sum Payment
The lump-sum payment you receive under the alternative annuity
option generally has a tax-free part and a taxable part. The tax-free
part represents part of your cost. The taxable part represents part of
the earnings on your annuity contract. If your lump-sum credit
(discussed later) includes a deemed deposit or redeposit, the taxable
amount may be more than the lump-sum payment. You must include the
taxable part of the lump-sum payment in your income for the year you
receive the payment unless you roll it over into another qualified
plan or a traditional IRA. If you do not have OPM transfer the taxable
amount to an IRA or other plan in a direct rollover, tax will be
withheld at a 20% rate. See Rollover Rules, later, for
information on how to make a rollover.
OPM can make a direct rollover only up to the amount of the
lump-sum payment. Therefore, to defer tax on the full taxable amount
if it is more than the payment, you must roll over the difference
within 60 days using your own funds.
The taxable part of the lump-sum payment does not
qualify as a lump-sum distribution eligible for capital gain treatment
or the 10-year tax option. It may also be subject to an additional 10%
tax on early distributions if you separate from service before the
calendar year in which you reach age 55. For more information, see
Lump-Sum Distributions and Tax on Early Distributions
in Publication 575.
Table 2.
Use Table 2, Worksheet for Lump-Sum Payment (near the
end of this publication), to figure the taxable part of your lump-sum
payment. Be sure to keep the completed worksheet for your records.
To complete the worksheet, you will need to know the amount of your
lump-sum credit and the present value of your annuity contract.
Lump-sum credit.
Generally, this is the same amount as the lump-sum payment you
receive (the total of your contributions to the retirement system and
interest on those contributions). However, for purposes of the
alternative annuity option, your lump-sum credit may also include
deemed deposits and redeposits that OPM advanced to your retirement
account so that you are given credit for the service they represent.
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 and did not repay. You are treated as
if you had received a lump-sum payment equal to the amount of your
lump-sum credit and then had made a repayment to OPM of the advanced
amounts.
Present value of your annuity contract.
The present value of your annuity contract is figured using
actuarial tables provided by the IRS.
To find out the present value of your annuity contract, call the
IRS Actuarial Branch 1 at 202-283-9717 (not a toll-free call).
Example.
David Brown retired from the federal government in 2000, one month
after his 55th birthday. He had contributed $31,000 to his retirement
plan and chose to receive a lump-sum payment of that amount under the
alternative annuity option. The present value of his annuity contract
was $155,000. Using the Table 2 worksheet, he figures the taxable part
of the lump-sum payment and his net cost in the plan. That worksheet
is shown on the next page.
graphic for David Brown Worksheet for Lump-sum Payment
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 tax-free part, you must treat the taxable part as received
first.
How to report.
Add any actual or deemed payment of your lump-sum credit (defined
earlier) to the total for line 16a, Form 1040, or line 12a, Form
1040A. Add the taxable part to the total for line 16b, Form 1040, or
line 12b, Form 1040A, unless you roll over the taxable part to a
traditional IRA or a qualified retirement plan.
If you receive the lump-sum payment in two installments, include
any interest paid with the second installment on line 8a of either
Form 1040 or Form 1040A.
Reduced Annuity
If you have chosen to receive a lump-sum payment under the
alternative annuity option, you will also receive reduced monthly
annuity payments. These annuity payments will each have a tax-free and
a taxable part. To figure the tax-free part of each annuity payment,
you must use the Simplified Method Worksheet (Table 1). For
instructions on how to complete the worksheet, see Table 1
under Simplified Method, earlier.
In completing line 2 of Table 1, you must reduce your cost in the
plan by the tax-free part of the lump-sum payment you received. Enter
as your net cost on line 2 the amount from line 5 of Table 2. Do
not include the tax-free part of the lump-sum payment with
other amounts recovered tax free (line 6 of Table 1) when limiting
your total exclusion to your total cost.
Example.
The facts are the same as in the example for David Brown in the
preceding discussion. In addition, David received 10 annuity payments
in 2000 of $1,200 each. Using the Table 1 worksheet, he figures the
taxable part of his annuity payments. He completes line 2 by reducing
his $31,000 cost by the $6,200 tax-free part of his lump-sum payment.
His entry on line 2 is his $24,800 net cost in the plan (the amount
from line 5 of Table 2). He does not include the tax-free
part of his lump-sum payment on line 6 of Table 1. David's filled-in
Table 1 worksheet is shown on page 10.
David's simplified method after receiving a lump-sum payment
Reemployment after choosing the alternative annuity option.
If you chose this option when you retired and then you were
reemployed by the federal government before retiring again, your Form
CSA 1099R may show only the amount of your contributions to your
retirement plan during your reemployment. If the amount on the form
does not include all your contributions, disregard it and use your
total contributions to figure the taxable part of your annuity
payments.
Annuity starting date before November 19, 1996.
If your annuity starting date is before November 19, 1996, and you
chose the alternative annuity option, the taxable and tax-free parts
of your lump-sum payment and your annuity payments are figured using
different rules. Under those rules, you do not reduce your
cost in the plan (line 2 of Table 1) by the tax-free part of the
lump-sum payment. However, you must include that tax-free amount with
other amounts previously recovered tax free (line 6 of Table 1) when
limiting your total exclusion to your total cost.
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 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 a traditional IRA or another
qualified retirement plan. If you do not have OPM transfer the
interest to an IRA or other plan in a direct rollover, tax will be
withheld at a 20% rate. See Rollover Rules, later. The
interest does not qualify as a lump-sum distribution
eligible for capital gain treatment or the 10-year tax option. It may
also be subject to an additional 10% tax on early distributions if you
separate from service before the calendar year in which you reach age
55. For more information, see Lump-Sum Distributions and
Tax on Early Distributions in Publication 575.
Community property laws.
State community property laws apply to your annuity. These laws
will affect your income tax only if you file a return separately 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 are later reemployed by the
federal government, you can continue to receive your annuity during
reemployment. 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. 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.
Nonresident Aliens
The following special rules apply to nonresident alien federal
employees performing services outside the United States and to
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 taxable amount of payments received from
the CSRS, the FERS, or the TSP by a nonresident alien retiree or
nonresident alien beneficiary. This limited taxable amount is in the
same proportion to the otherwise taxable amount that the retiree's
total U.S. Government basic pay other than tax-exempt pay for services
performed outside the United States is to the retiree's total U.S.
Government basic pay for all services.
Basic pay includes 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.
To figure the limited taxable amount of your CSRS or FERS annuity
or your TSP distributions, use the following worksheet. (For an
annuity, first complete Table 1 in this publication.)
Blank worksheet Nonresident Alien
Example 1.
You are a nonresident alien who performed all services for the U.S.
Government abroad as a nonresident alien. You retired and began to
receive a monthly annuity of $200. Your total basic pay for all
services for the U.S.Government was $100,000.
The taxable amount of your annuity figured using Table 1 in this
publication is $720. Because you are a nonresident alien, you figure
the limited taxable amount of your annuity as follows.
Filled graphic for Nonresident Alien first line is 720
Example 2.
You are a nonresident alien who performed services for the U.S.
Government as a nonresident alien both within the United States and
abroad. You retired and began to receive a monthly annuity of $240.
Your total basic pay for your services for the U.S. Government 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.
The taxable amount of your annuity figured using Table 1 in this
publication is $1,980. Because you are a nonresident alien, you figure
the limited taxable amount of your annuity as follows.
Filled in graphic for Nonresident Alien first line$1,980
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 a traditional IRA or other qualified retirement plan, the
tax on that part is deferred until you receive payments from the
traditional 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. The
payments are not subject to the additional 10% 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 within
60 days into a traditional 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
10-year tax option to figure your tax. See Lump-Sum Distributions
in Publication 575
for details.
If you receive a single payment or you choose to receive your
account balance in monthly payments over a period of less than 10
years, the TSP must withhold 20% for federal income tax. If you choose
to receive your account balance in monthly payments over a period of
10 or more years or a period based on your life expectancy, the
payments 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.
Any money paid to you from your TSP account before you reach age 59 1/2 may be subject to an additional 10% tax on early
distributions. However, this additional tax does not apply in any of
the following situations.
- You separate from government service during or after the
calendar year in which you reach age 55.
- You choose to receive your account balance in monthly
payments based on your life expectancy.
- You retire on disability.
For more information, see Tax on Early Distributions in
Publication 575.
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 a traditional 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 (Rev. July 1998) and Tax
Treatment of TSP Payments to Nonresident Aliens and Their
Beneficiaries (Rev. August 1998), which are available from your
agency personnel office or from the TSP.
The above documents are also available on the Internet at
www.tsp.gov. Select "Forms and Publications."
Rollover Rules
A rollover is a tax-free withdrawal of cash or other assets from
one qualified retirement plan or traditional IRA and its reinvestment
in another qualified retirement plan or traditional IRA. Do not
include the amount rolled over in your income, and you cannot take a
deduction for it. The amount rolled over is taxed later as the new
program pays that amount to you. If you roll over amounts into a
traditional IRA, later distributions of these amounts from the
traditional IRA do not qualify for the capital gain or the 10-year tax
option. Capital gain treatment or the 10-year tax option will be
restored if the traditional IRA contains only amounts rolled over from
a qualified plan and these amounts are rolled over from the
traditional 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:
- A distribution of your account balance that you choose to
receive in monthly payments over:
- Your life expectancy, or
- A period of 10 years or more,
- A required minimum distribution generally beginning at age
70 1/2,
- A declared distribution because of an unrepaid loan, if you
have not separated from government service (see Outstanding loan
under Thrift Savings Plan, earlier), or
- A hardship distribution.
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 a
traditional IRA. The distribution cannot be rolled over into an
education IRA or a Roth 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 traditional 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 a traditional 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 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 February 1, 2001, 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 2, 2001.
If you roll over only $8,000, you must include in your gross 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:
- The bankruptcy or insolvency of the financial institution,
or
- 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 a traditional 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 require the plan to pay benefits in a form not offered by the
plan, nor can it require the plan to pay increased 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 a
traditional 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.
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 12a and the taxable amount minus the
amount rolled over on line 12b.
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:
- Your right to have the distribution paid tax free directly
to another qualified retirement plan or to a traditional IRA,
- The requirement to withhold tax from the distribution if it
is not paid directly to another qualified retirement plan or to a
traditional IRA,
- The nontaxability of any part of the distribution that you
roll over to another qualified retirement plan or to a traditional IRA
within 60 days after you receive the distribution, and
- 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 the TSP or OPM make a
distribution less than 30 days after the explanation is provided, as
long as the following two requirements are met.
- 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.
- 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
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 12a. Also include on that line the total of any other
pension plan payments (even if fully taxable, such as those from the
TSP) 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 12b (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 12a
and 12b; follow the Form 4972 instructions.
If you received only fully taxable payments from your retirement,
the TSP, or other pension plan, report on Form 1040, line 16b, or Form
1040A, line 12b, 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 12a (Form 1040A).
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