If you leave federal government service or transfer to a job not under the CSRS or FERS and you are not eligible for an immediate annuity, you can choose to receive a refund of the money in your CSRS or FERS retirement account. The refund will include both regular and voluntary contributions you made to the fund, plus any interest payable.

If the refund includes only your contributions, none of the refund is taxable. If it includes any interest, the interest is taxable unless you roll it over into another qualified plan or a traditional individual retirement arrangement (IRA). If you do not have the Office of Personnel Management (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 in Part II for information on how to make a rollover.

If you do not roll over interest included in your refund, it may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. If you separate from service before the calendar year in which you reach age 55, it may be subject to an additional 10% tax on early distributions. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Publication 575.

The CSRS or FERS annuity you receive is subject to federal income tax withholding, unless you choose not to have tax withheld. OPM will tell you how to make the choice. The choice for no withholding remains in effect until you change it. These withholding rules also apply to a disability annuity, whether received before or after minimum retirement age.

If you choose not to have tax withheld, or if you do not have enough tax withheld, you may have to make estimated tax payments.

If your gross income, including the taxable part of your annuity, is less than a certain amount, you generally do not have to file a federal income tax return for that year. The gross income filing requirements for the tax year are in the instructions to the Form 1040, 1040A, or 1040EZ.

Form CSF 1099R.   Form CSF 1099R will be mailed to you by January 31 after the end of each tax year. It will show the total amount of the annuity you received in the past year. It also should show, separately, the survivor annuity for a child or children. Only the part that is each individual's survivor annuity should be shown on that individual's Form 1040 or 1040A.

  If your Form CSF 1099R does not show separately the amount paid to you for a child or children, attach a statement to your return, along with a copy of Form CSF 1099R, explaining why the amount shown on the tax return differs from the amount shown on Form CSF 1099R.

  

You may request a Summary of Payments, showing the amounts paid to you for your child(ren), from OPM by calling OPM's Retirement Information Office at 1-888-767-6738 (customers within the local Washington, D.C. calling area must call 202-606-0500). You will need your CSF claim number and your social security number when you call.

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.

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.

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 your 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.

If you are eligible, you may choose an alternative form of annuity. If you make this choice, you will receive a lump-sum payment equal to your contributions to the plan and a reduced monthly annuity. You are eligible to make this choice if you meet all of the following requirements.

If you are not eligible or do not choose this alternative annuity, you can skip the following discussion and go to Federal Gift Tax on page 9.

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 add funds from another source.

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 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.

Worksheet B.   Use Worksheet B, 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). However, for purposes of the alternative annuity option, your lump-sum credit also may 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.

If you are receiving a lump-sum payment under the Alternative Annuity Option, you can call IRS Actuarial Group 1 at 202-283-9717 (not a toll-free call) to find out the present value of your annuity contract.

Example.

David Brown retired from the federal government in 2004, 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.

The tax-free part and the taxable part of the lump-sum payment are figured using Worksheet B, as shown below. The taxable part ($24,800) is also his net cost in the plan, which is used to figure the taxable part of his reduced annuity payments. See Worksheet A, later under Reduced Annuity.

Worksheet B. Lump-Sum Payment for David Brown Keep for Your Records See the instructions in Part II of this publication under Alternative Annuity Option.

1.	Enter your lump-sum credit (your cost in the plan at the annuity starting date)	1.	$ 31,000
2.	Enter the present value of your annuity contract	2.	155,000
3.	Divide line 1 by line 2	3.	.20
4.	Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet A in this publication.)	4.	$6,200
5.	Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet A in this publication.	5.	$24,800

Worksheet B. Lump-Sum Payment for David Brown Keep for Your Records See the instructions in Part II of this publication under Alternative Annuity Option.

1.	Enter your lump-sum credit (your cost in the plan at the annuity starting date)	1.	$ 31,000
2.	Enter the present value of your annuity contract	2.	155,000
3.	Divide line 1 by line 2	3.	.20
4.	Tax-free amount. Multiply line 1 by line 3. (Caution: Do not include this amount on line 6 of Worksheet A in this publication.)	4.	$6,200
5.	Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on line 16b of Form 1040 or line 12b of Form 1040A. Also, enter this amount on line 2 of Worksheet A in this publication.	5.	$24,800

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 Form 1040, line 16a, or Form 1040A, line 12a. Add the taxable part to the total for Form 1040, line 16b, or Form 1040A, line 12b, unless you roll over the taxable part to your 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 also will receive reduced monthly annuity payments. These annuity payments each will 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 A). For instructions on how to complete the worksheet, see Worksheet A under Simplified Method, earlier.

To complete Worksheet A, line 2, 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 Worksheet B, line 5. Do not include the tax-free part of the lump-sum payment with other amounts recovered tax free (Worksheet A, line 6) 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 2004 of $1,200 each. Using Worksheet A, 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 Worksheet B, line 5). He does not include the tax-free part of his lump-sum payment on Worksheet A, line 6. David's filled-in Worksheet A is shown on the next page.

Filled-In Worksheet A. Simplified Method for David Brown Keep for Your Records See the instructions in Part II of this publication under Simplified Method.

1.	Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a				1.	$ 12,000
2.	Enter your cost in the plan at the annuity starting date plus any death benefit exclusion *				2.	24,800
	Note:If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3.
3.	Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1				3.	360
4.	Divide line 2 by line 3				4.	68.89
5.	Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6				5.	688.90
6.	Enter any amounts previously recovered tax free in years after 1986				6.	0
7.	Subtract line 6 from line 2				7.	24,800
8.	Enter the smaller of line 5 or line 7				8.	688.90
9.	Taxable amount 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 12b. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead				9.	$11,311.10
10.	Add lines 6 and 8				10.	688.90
11.	Balance of cost to be recovered. Subtract line 10 from line 2				11.	$24,111.10
Table 1 for Line 3 Above
	IF the age at annuity starting date was		AND your annuity starting date was—
			before November 19, 1996, enter on line 3	after November 18, 1996, enter on line 3
	55 or under		300	360
	56–60		260	310
	61–65		240	260
	66–70		170	210
	71 or over		120	160
Table 2 for Line 3 Above
	IF the combined ages at annuity starting date were		THEN enter on line 3
	110 or under		410
	111–120		360
	121–130		310
	131–140		260
	141 or over		210

*A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996.

Filled-In Worksheet A. Simplified Method for David Brown Keep for Your Records See the instructions in Part II of this publication under Simplified Method.

1.	Enter the total annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a, or Form 1040A, line 12a				1.	$ 12,000
2.	Enter your cost in the plan at the annuity starting date plus any death benefit exclusion *				2.	24,800
	Note:If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3.
3.	Enter the appropriate number from Table 1 or 2 below. Use Table 2 if your annuity starting date is after 1997 and payments are for your life and the life of your beneficiary. Otherwise use Table 1				3.	360
4.	Divide line 2 by line 3				4.	68.89
5.	Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise go to line 6				5.	688.90
6.	Enter any amounts previously recovered tax free in years after 1986				6.	0
7.	Subtract line 6 from line 2				7.	24,800
8.	Enter the smaller of line 5 or line 7				8.	688.90
9.	Taxable amount 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 12b. If your Form CSA 1099R or Form CSF 1099R shows a larger amount, use the amount on this line instead				9.	$11,311.10
10.	Add lines 6 and 8				10.	688.90
11.	Balance of cost to be recovered. Subtract line 10 from line 2				11.	$24,111.10
Table 1 for Line 3 Above
	IF the age at annuity starting date was		AND your annuity starting date was—
			before November 19, 1996, enter on line 3	after November 18, 1996, enter on line 3
	55 or under		300	360
	56–60		260	310
	61–65		240	260
	66–70		170	210
	71 or over		120	160
Table 2 for Line 3 Above
	IF the combined ages at annuity starting date were		THEN enter on line 3
	110 or under		410
	111–120		360
	121–130		310
	131–140		260
	141 or over		210

*A death benefit exclusion up to $5,000 applied to certain benefits received by survivors of employees who died before August 21, 1996.

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 (Worksheet A, line 2) 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 (Worksheet A, line 6) when limiting your total exclusion to your total cost.

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.

If you have recently retired, the following discussions covering annual leave, voluntary contributions, and community property may apply to you.

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.

The following special rules apply to nonresident alien federal employees performing services outside the United States and to nonresident alien retirees and beneficiaries.

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.