Part II Rules for Retirees

This part of the publication is for retirees who retired on nondisability retirement.

If you retired on disability before you reached your

TIP minimum retirement age, see Rules for Disability

Retirement and Credit for the Elderly or the Disa- bled under Part III , later. However, on the day after you reach your minimum retirement age, use the rules in this section to report your disability retirement and begin re- covering your cost.

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 doesn’t 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 applies) but before any deduction for income tax withholding, insurance premiums, etc.

Your cost. Your monthly annuity payment 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 didn’t 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If you repaid contributions that you had withdrawn from the retirement plan earlier, or if you paid into the plan to receive full credit for service not subject to retirement deductions, the entire repayment,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 can’t claim an interest deduction for any interest payments. You can’t 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 3-Year Rule or the General Rule (both dis- cussed 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 (discussed later).

• 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 (unless such payment is used for purposes discussed under Distributions Used To Pay Insurance Premiums for Public Safety Officers , later). The tax-free part is a fixed dollar amount. It remains the same, even if your annuity is increased. However, if your annuity starting date is after 1986, a limit applies to the total amount of annuity income that you (or the survivor annuitant) can exclude over the years. See Exclusion limit , later.

Choosing a survivor annuity after retirement. If you retired without a survivor annuity and report your annuity under the Simplified Method, don’t change your

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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 the tax-free part of your annuity using a new exclusion percentage if you later choose a survivor annuity and take reduced annuity payments. To figure the new exclusion percentage, 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 Pub. 939.

For more information about choosing or canceling a survivor annuity after retirement, contact OPM’s Retirement Information Office at 1-888-767-6738.

Exclusion limit. Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years.

Annuity starting date after 1986. 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 can’t exceed your total cost. Annuity payments you or your survivors receive after the total cost in the plan has been recovered are generally 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 generally fully taxable.

Annuity starting date before 1987. If your annuity starting date is before 1987, you can continue to take your monthly exclusion figured under the General Rule or the Simplified Method for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue 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 hasn’t 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 an “Other Itemized Deduction.” If your annuity starting date is before July 2, 1986, no tax benefit is allowed for any unrecovered cost at death.

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 1099-R 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 doesn’t 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 before November 19, 1996, or after November 18, 1996. 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.

Worksheet A. Use Worksheet A (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 Worksheet A, you can generally use

TIP the Simplified Method Worksheet in the Instruc-

tions for Form 1040 to figure your taxable annuity. However, you must use Worksheet A and Worksheet B in this publication if you chose the alternative annuity option, discussed later.

Line 2. See Your cost, earlier, 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. The number you enter on line 3 is the appropriate number from Table 1 or 2 representing approximate life expectancies in months. 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 received contributions tax free before 2025, 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, this amount includes the tax-free part of the lump-sum payment you received.

Example. Bill Smith retired from the federal government on March 31, 2025, under an annuity that will provide a survivor benefit for his wife, Kathy. His annuity starting date is April 1, 2025, the annuity is paid in arrears, and he received his first monthly annuity payment on May 1, 2025. 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 $31,000 to his retirement plan and had received no distributions before his annuity starting date. At his annuity starting date, he was age 65 and Kathy was age 57.

Bill’s completed Worksheet A is shown later. To complete line 3, he used Table 2 at the bottom of the worksheet and found that 310 is 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.

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Bill’s tax-free monthly amount is $100. (See line 4 of the worksheet.) If he lives to collect more than 310 monthly payments, he will generally have to include in his gross income the full amount of any annuity payments received after 310 payments have been made.

If Bill doesn’t live to collect 310 monthly payments and his wife begins to receive monthly payments, she will also exclude $100 from each monthly payment until 310 payments (Bill’s and hers) have been collected. If she dies before 310 payments have been made, an “Other Itemized Deduction” will be allowed for the unrecovered cost on her final income tax return.

If your annuity starting date is after November 18, 1996, you can’t 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 couldn’t use the 3-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 Pub. 939.

If your annuity starting date was before July 2, 1986, you probably had to report your annuity using the 3-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 can’t use another rule to again exclude amounts from income.

The 3-Year Rule was repealed for retirees whose annuity starting date is after July 1, 1986.

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Worksheet A.

Simplified Method for Bill Smith

See the instructions under Simplified Method in Part II of this publication.

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

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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.

• You are retiring, but not on disability.

• You have a life-threatening illness or other critical medical condition.

• You don’t have a former spouse entitled to court-ordered benefits based on your service.

If you aren’t eligible or don’t choose this alternative annuity, you can skip the following discussion and go to Fed- eral Gift Tax , later.

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. Your lump-sum credit (discussed later) may include a deemed deposit or redeposit that is treated as being included in your lump-sum payment even though you don’t actually receive such amounts. Deemed deposits and redeposits, which are described later under Lump-sum credit, are taxable to you in the year of retirement. Your taxable amount may therefore be more than the lump-sum payment you receive.

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 an IRA. If you don’t 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