Q. I am a new federal employee with 10 years of military service since 2002. I plan to buy my military service time toward retirement, but I want to wait until just before the interest starts to kick in at three years. Is there any reason I should pay the deposit now instead of waiting and earning interest on that money in the meantime? I had also considered using payroll deduction to buy back my time until I learned it wasn’t a pre-tax deduction. Aren’t FERS contributions normally pre-tax? Isn’t this an example of being double-taxed?
A. Check with your agency to be sure when the interest-free period ends. That way you can be sure to make the deposit before interest begins to accrue.
Retirement deductions taken from your salary are taxed as regular income. When you retire, a portion of your annuity will be tax-free because it was already taxed as part of your regular income. Deposits to get credit for a period of service, whether military or civilian, are not tax-deferred. However, like the deductions taken from your salary, they will be part of the tax-free portion of your annuity.
