Publication 721 - Tax Guide To U.s. Civil Service Retirement Benefits - 2011 Page 8
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31Alternative Annuity Option
contributions to the retirement system). However, for pur-
poses of the alternative annuity option, your lump-sum
credit also may include deemed deposits and redeposits
If you are eligible, you may choose an alternative form of
annuity. If you make this choice, you will receive a
that OPM advanced to your retirement account so that you
lump-sum payment equal to your contributions to the plan
are given credit for the service they represent. Deemed
and a reduced monthly annuity. You are eligible to make
deposits (including interest) are for federal employment
this choice if you meet all of the following requirements.
during which no retirement contributions were taken out of
your pay. Deemed redeposits (including interest) are for
•
You are retiring, but not on disability.
any refunds of retirement contributions that you received
•
You have a life-threatening illness or other critical
and did not repay. You are treated as if you had received a
medical condition.
lump-sum payment equal to the amount of your lump-sum
•
credit and then had made a repayment to OPM of the
You do not have a former spouse entitled to court
advanced amounts.
ordered benefits based on your service.
Present value of your annuity contract. The present
If you are not eligible or do not choose this alternative
value of your annuity contract is figured using actuarial
annuity, you can skip the following discussion and go to
tables provided by the IRS.
Federal Gift
Tax, later.
If you are receiving a lump-sum payment under
the Alternative Annuity Option, you can write to
Lump-Sum Payment
the address below to find out the present value of
your annuity contract.
The lump-sum payment you receive under the alternative
annuity option generally has a tax-free part and a taxable
Internal Revenue Service
part. The tax-free part represents part of your cost. The
Attn: Actuarial Group 2
taxable part represents part of the earnings on your annu-
TE/GE SE:T:EP:RA:T:A2
ity contract. Your lump-sum credit (discussed later) may
include a deemed deposit or redeposit that is treated as
NCA-629
being included in your lump-sum payment even though
1111 Constitution Ave., NW
you do not actually receive such amounts. Deemed depos-
Washington, DC 20224-0002
its and redeposits, which are described later under
Lump-sum credit, are taxable to you in the year of retire-
Example. David Brown retired from the federal govern-
ment. Your taxable amount may therefore be more than
ment in 2011, one month after his 55th birthday. He had
the lump-sum payment you receive.
contributed $31,000 to his retirement plan and chose to
You must include the taxable part of the lump-sum
receive a lump-sum payment of that amount under the
payment in your income for the year you receive the
alternative annuity option. The present value of his annuity
payment unless you roll it over into another qualified plan
contract was $155,000.
or an IRA. If you do not have OPM transfer the taxable
The tax-free part and the taxable part of the lump-sum
amount to an IRA or other plan in a direct rollover, tax will
payment are figured using Worksheet B, as shown on the
be withheld at a 20% rate. See
Rollover
Rules, later, for
next page. The taxable part ($24,800) is also his net cost in
information on how to make a rollover.
the plan, which is used to figure the taxable part of his
OPM can make a direct rollover only up to the
reduced annuity payments. See
Reduced
Annuity, later.
!
amount of the lump-sum payment. Therefore, to
defer tax on the full taxable amount if it is more
Lump-sum payment in installments. If you choose the
CAUTION
than the payment, you must add funds from another
alternative annuity option, you usually will receive the
source.
lump-sum payment in two equal installments. You will
The taxable part of the lump-sum payment does not
receive the first installment after you make the choice upon
qualify as a lump-sum distribution eligible for capital gain
retirement. The second installment will be paid to you, with
treatment or the 10-year tax option. It also may be subject
interest, in the next calendar year. (Exceptions to the
to an additional 10% tax on early distributions if you sepa-
installment rule are provided for cases of critical medical
rate from service before the calendar year in which you
need.)
reach age 55, even if you reach age 55 in the year you
Even though the lump-sum payment is made in install-
receive the lump-sum payment. For more information, see
ments, the overall tax treatment (explained at the begin-
Lump-Sum Distributions and Tax on Early Distributions in
ning of this discussion) is the same as if the whole payment
Publication 575.
were paid at once. If the payment has a tax-free part, you
Worksheet B. Use
Worksheet B. Lump-Sum Payment
must treat the taxable part as received first.
(near the end of this publication), to figure the taxable part
of your lump-sum payment. Be sure to keep the completed
How to report. Add any actual or deemed payment of
worksheet for your records.
your lump-sum credit (defined earlier) to the total for Form
To complete the worksheet, you will need to know the
1040, line 16a; Form 1040A, line 12a; or Form 1040NR,
amount of your lump-sum credit and the present value of
line 17a. Add the taxable part to the total for Form 1040,
your annuity contract.
line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b,
unless you roll over the taxable part to your traditional IRA
Lump-sum credit. Generally, this is the same amount
or a qualified retirement plan.
as the lump-sum payment you receive (the total of your
Page 8
Publication 721 (2011)
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