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 Worksheet A) 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 Worksheet A) 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 generally will 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 a 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.

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 a traditional IRA or other qualified retirement 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 also may 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 usually 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 generally is 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 Worksheet A in this publication.)

Worksheet C. Limited Taxable Amount for Nonresident Alien

1.	Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A) or TSP distributions		1.
2.	Enter the total U.S. Government basic pay other than tax-exempt pay for services performed outside the United States		2.
3.	Enter the total U.S. Government basic pay for all services		3.
4.	Divide line 2 by line 3		4.
5.	Limited taxable amount. Multiply line 1 by line 4. Enter this amount on Form 1040NR, line 17b		5.

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 using Worksheet A in this publication is $720. You are a nonresident alien, so you figure the limited taxable amount of your annuity as follows.

Worksheet C. Limited Taxable Amount for Nonresident Alien - Example 1

1.	Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A) or TSP distributions		1.	$     720
2.	Enter the total U.S. Government basic pay other than tax-exempt pay for services performed outside the United States		2.	0
3.	Enter the total U.S. Government basic pay for all services		3.	100,000
4.	Divide line 2 by line 3		4.	0
5.	Limited taxable amount. Multiply line 1 by line 4. Enter this amount on Form 1040NR, line 17b		5.	0

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 - $40,000 was for work done in the United States and $80,000 was for your work done in a foreign country.

The taxable amount of your annuity figured using Worksheet A in this publication is $1,980. You are a nonresident alien, so you figure the limited taxable amount of your annuity as follows.

Worksheet C. Limited Taxable Amount for Nonresident Alien - Example 2

1.	Enter the otherwise taxable amount of the CSRS or FERS annuity (from line 9 of Worksheet A) or TSP distributions		1.	$    1,980
2.	Enter the total U.S. Government basic pay other than tax-exempt pay for services performed outside the United States		2.	40,000
3.	Enter the total U.S. Government basic pay for all services		3.	120,000
4.	Divide line 2 by line 3		4.	.333
5.	Limited taxable amount. Multiply line 1 by line 4. Enter this amount on Form 1040NR, line 17b		5.	659

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 included previously 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 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 generally 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 59½ may be subject to an additional 10% tax on early distributions. However, this additional tax does not apply in any of the following situations.

1. You separate from government service during or after the calendar year in which you reach age 55.
2. You choose to receive your account balance in monthly payments based on your life expectancy.
3. 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 TSP Account and Tax Treatment of Thrift Savings Plan Payments to Nonresident Aliens and Their Beneficiaries, 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 & 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. However, 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.

Qualified retirement plan.   For this purpose, a qualified retirement plan generally is:

• A qualified employee plan,
• A qualified employee annuity,
• A tax-sheltered annuity plan (403(b) plan), or
• An eligible state or local government section 457 deferred compensation plan.

The CSRS, FERS, and 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. A distribution of your account balance that you choose to receive in monthly payments over:
   1. Your life expectancy,
   2. The joint life expectancies of you and your beneficiary, or
   3. A period of 10 years or more,
2. A required minimum distribution generally beginning at age 70½,
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), or
4. 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 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 generally 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 59½ 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. However, 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, 2003, 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.

If you roll over only $8,000, you must include in your 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 generally must complete the rollover of an eligible rollover distribution by the 60th day following the day on which you receive the distribution.

The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control.

Frozen deposits.   If an amount distributed to you becomes a frozen deposit in a financial institution during the 60-day period after you receive it, the rollover period is extended. An amount is a frozen deposit if 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.

The 60-day rollover period is extended by the period for which the amount is a frozen deposit and does not end earlier than 10 days after the amount is no longer a frozen deposit.

Qualified domestic relations order (QDRO).   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 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. You generally can roll over the distribution into a qualified retirement plan or a traditional IRA.

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 all of the following.

• 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 directly rolled over.
• The nontaxability of any part of the distribution that you roll over within 60 days after you receive the distribution.
• Other qualified retirement plan rules that apply, including those for lump-sum distributions, alternate payees, and cash or deferred arrangements.
• How the distribution rules of the plan you roll the distribution over to may differ from the rules that apply to the plan making the distribution in their restrictions and tax consequences.

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.   Table 1 may help you decide which distribution option to choose. Carefully compare the effects of each option.

Table 1. Comparison of Payment to You Versus Direct Rollover

Affected item	Result of a payment to you	Result of a direct rollover
Withholding	The payer must withhold 20% of the taxable part.	There is no withholding.
Additional tax	If you are under age 59½, a 10% additional tax may apply to the taxable part (including an amount equal to the tax withheld) that is not rolled over.	There is no 10% additional tax. See Tax on early distributions.
When to report as income	Any taxable part (including the taxable part of any amount withheld) not rolled over is income to you in the year paid.	Any taxable part is not income to you until later distributed to you from the new plan or IRA.

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