Know your options with FERS refunds: is it better to redeem retirement contribution deductions or defer retirement?
Understanding FERS Refunds for Retirement Deductions vs. Deferred Retirement
Figuring out the intricacies of FERS refunds, the application process, rollover options, and the implications of redeeming retirement contributions is important when deciding between taking the refunded contributions or a deferred retirement under FERS. Depending on age, years of service, and the amount of the refund of retirement deduction, deciding between a deferred pension and investing your retirement contributions could have drastic implications for one’s future financial situation in retirement.
What is a FERS Refund and How Does It Affect My Retirement?
Contributions to the Federal Employees Retirement System (FERS)
The Federal Employees Retirement System (FERS) is a retirement plan designed to provide federal employees with retirement benefits. It comprises three main components: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan (TSP). FERS contributions are deducted from an employee’s salary to fund these benefits. Employees hired before 2013 contribute 0.8% of their pay to the retirement system, those hired in 2013 (FERS-RAE) contribute 3.1% and if hired in 2014 or later, the contribution rate is 4.4% (FERS-FRAE).
How Does a Refund of Retirement Contributions Work?
A refund of retirement contributions occurs when a federal employee leaves service and decides to withdraw their FERS contributions before reaching retirement age. This refund process involves the Office of Personnel Management (OPM) returning the amount of contributions made by the employee, minus any applicable deductions. It’s important to note that receiving a refund of retirement contributions means forfeiting any future retirement benefits associated with those contributions, although a redeposit can be made for refunded contributions if the worker returns to a federal job later. Receiving a refund of your retirement contributions can have lasting effects on your future retirement benefits. When you opt for a refund, you effectively lose the years of creditable service associated with those contributions. This means that your annuity and overall retirement benefits will be reduced, potentially affecting your financial stability in retirement. Additionally, if you later decide to return to federal service, you may need to make a redeposit, including the amount plus interest, to restore your creditable service and retirement benefits.
Refunded Contributions vs. Deferred Retirement
Tax Rules, Savings Options, and Implication of Deferring Retirement
Unlike contributions to a traditional TSP account, FERS deductions are made with post-tax money. If the contributed funds have gained any interest, then that portion will be taxed when taking a refund. Therefore, refunded contributions can be placed in a non-retirement savings or investment account, or (if under the income limit) a Roth IRA. Alternatively, a worker leaving the government voluntarily or involuntarily can defer their FERS pension to their minimum retirement age (MRA) with at least 30 years of service, to age 60 with 20 years, or to age 62 with at least 5 years, although keep in mind that collecting the annuity before age 62 incurs age reductions.
You can estimate your Federal Retirement with our FERS Pension Calculator.
Invest Refunded Contributions or Defer FERS Retirement?
Example 1. If one employee is 35 and has 5 years of creditable federal service, along with a high-3 average salary of $75,000, their annual pension at 62 would be about $3,750 if they choose to defer. The refund of FERS retirement deductions, after interest has been added, would be roughly $20,000. If we assume a 10% annual rate of return in a Roth IRA or non-retirement investment account, the following comparison shows why taking the refund and investing it could be more advantageous than deferring the pension:
The above is for illustrative purposes only as it doesn’t take taxation into account, and assumes the invested refund stops growing after withdraws begin at age 62. The next example demonstrates that with more years of service along with leaving the government at an older age can make the decision less cut-and-dry.
Example 2. If another federal employee is 48 and has 15 years of creditable service, with a high-3 average of $100,000, their deferred annual pension amount at 62 would be $15,000. Their refunded service deductions, should they request a refund, would be about $62,000. In this case, deferring their pension from the FERS system might be smarter than filling out a refund application and investing:
How Do I Apply for a Refund of Retirement Contributions?
Steps to Complete the Application for Refund of Retirement
Applying for a refund of retirement contributions involves several steps. First, you must complete the appropriate application for refund form, the SF 3106 is the standard form for FERS employees. This form requires detailed information about your federal employment history and the amount of contributions you wish to refund. Once completed, the form should be submitted to the OPM for processing. It’s crucial to ensure all information is accurate and complete to avoid delays in receiving your refund.
Need help filling out your SF 3106 form? Schedule a meeting with a federal benefits expert.
Required Forms and Documentation for the Refund Process
In addition to the application for refund form, you may need to provide additional documentation to support your refund request. This can include proof of federal employment, such as SF 50 forms, and any other relevant documents that verify your years of service and contributions. The OPM may also require identification and direct deposit information to process your refund efficiently. Ensuring you have all necessary documentation ready can streamline the refund process and help you receive your refund in a timely manner.
Timeline for Receiving a Refund from the Office of Personnel Management (OPM)
The timeline for receiving a refund from the OPM can vary depending on several factors, including the completeness of your application and the current workload of the OPM’s retirement operations. Typically, it can take several weeks to a few months for the OPM to process a refund of retirement contributions. Staying informed about the status of your application and promptly responding to any requests for additional information can help expedite the process and ensure you receive your refund as quickly as possible.
Can I Rollover My FERS Refund Payment?
Eligibility Criteria for Rollover of Refund Payment
Rolling over a FERS refund payment into an individual retirement account or another retirement plan that accepts rollovers is an option for some federal employees. To be eligible for a rollover, you must meet specific criteria, including having separated from federal service and not having reached retirement eligibility. A rollover can be a beneficial way to preserve your retirement savings and defer federal income tax on the refund amount, allowing your funds to continue growing tax-deferred.
Tax Implications and Benefits of Rolling Over a Refund
Rolling over your FERS refund payment can have significant tax implications. By rolling over the refund into a qualified retirement plan, you can defer paying federal income tax on the amount, potentially reducing your current tax liability. Additionally, a rollover allows your retirement savings to continue growing tax-deferred, enhancing your financial security in retirement. It’s essential to consult with a financial advisor to understand the specific tax benefits and implications of a rollover based on your individual circumstances.
What Happens if I Want to Make a Redeposit for Refunded FERS Service?
Understanding the Redeposit Process
If you have previously received a refund of your retirement contributions and wish to restore your creditable service, you can make a redeposit if you worked under FERS after October 2009. The redeposit process involves repaying the amount of the refund plus interest to the OPM. This option is available to former employees who return to federal service and want to regain the years of service and retirement benefits they forfeited by taking a refund.
Calculating the Amount Plus Interest for Redeposit
Calculating the amount plus interest for a redeposit can be complex, as it involves determining the original refund amount and the interest accrued since the refund was issued. The OPM provides guidance on calculating the interest, which is typically compounded annually. It’s essential to accurately calculate the total redeposit amount to ensure you restore your full creditable service and retirement benefits. Consulting with the OPM or a financial advisor can help you navigate this process and make informed decisions about your redeposit.
Impact on Annuity and Retirement Benefits
Making a redeposit can have a significant impact on your annuity and overall retirement benefits when you apply for monthly retirement benefit payments. By restoring your creditable service, you can increase the amount of your annuity and enhance your financial security in retirement. Additionally, a redeposit can improve your eligibility for certain retirement benefits, such as the FERS annuity supplement. Understanding the long-term benefits of a redeposit is essential for those looking to maximize their retirement income and ensure a comfortable retirement.
Attend a Federal Retirement Workshop, register for a free online FERS Seminar.
How Does Deferred Retirement Work for Former Employees?
Eligibility for Deferred Retirement for CSRS and FERS Employees
Deferred retirement is an option for former employees who have left federal service before reaching retirement age but have accumulated enough years of service to qualify for retirement benefits. Under both FERS and the Civil Service Retirement System (CSRS), former employees can defer their retirement benefits until they reach the appropriate retirement age (55 – 57), although remaining CSRS workers should be eligible for an immediate retirement now. For FERS, at least five years of service are required along with being below the MRA to collect or postpone their retirement annuity.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
