Retirement contributions and taxes


If you are a federal employee, every pay period retirement deductions are taken from your salary.

Retirement Deductions

If you are a CSRS employee, that deduction is 7 percent (7.5 percent if you are a special category employee, such as a law enforcement officer, firefighter or air traffic controller). If you are a CSRS Offset employee, it’s also 7 percent (7.5 percent if you are a special category employee); however, because you are covered by both CSRS and Social Security, 6.2 percent of that amount goes to pay for Social Security Old-Age, Survivors and Disability Insurance (OASDI).

If you are a FERS employee hired before 2013, the contributions rate is 0.8 percent (1.3 percent if a special category employee). On the other hand, the contribution rate is 3.1 percent if you were first hired, or rehired after a break in service, during 2013 or later; however, it’s still 0.8 percent if you were rehired with at least five years of prior creditable or potentially creditable civilian service. Potentially creditable means that you’d get credit for that time if you made a deposit or redeposit to the retirement fund.

Refund of Contributions

If you leave government before being eligible for an immediate annuity, you have the option of leaving your contributions in the retirement fund or withdrawing them in total. You may want to leave that money in the fund if you either anticipate returning to work for the government or because you’ll be eligible for a deferred annuity.

However, if you resign and want an immediate refund, you’ll have to wait until you’ve been separated from the service for at least 31 days. If you are already off the rolls, you can apply for a refund up to 31 days before your 62nd birthday. In either case, receiving a refund of your retirement contributions would void all future entitlement to an annuity. The only exception is if you return to work for the government and repay the amount that was refunded to you, plus accrued interest. Depending on the length of time between when you left and returned, that could amount to a little or a lot of interest.

Interest on Refunds

Under both CSRS and FERS, you won’t receive any interest on your contributions if you served less than one year. If you are a former CSRS employee with more than one year but fewer than five years of service, you’d get your refund plus 3 percent interest. If you had more than five years of service, you wouldn’t get any interest, just a refund of your contributions. Under FERS, all refunds of more than one year included interest. That interest is based on variable interest rates determined by the Treasury Department. While interest rates have been as high as 11.125 percent, over the last two years they have been stuck at 1.625 percent.

What happens to contributions at retirement?

The retirement world used to be a simple place. When you retired, 100 percent of the money you received in your monthly annuity payments came from the amount you had contributed to the retirement fund while you were working. Since you had already paid taxes on your contributions, that money was tax free. Only after that money ran out did you begin receiving the government’s share. And that money was fully taxable. Then the world was turned upside down.

Decades ago the law changed. You’ll find that change reflected in IRS Publication 721, which states: “Part of the annuity benefits you receive is a tax-free recovery of your contributions to the CSRS or FERS. The rest of your benefits are taxable. If your annuity starting date is after Nov.ember 18, 1996, you must use the Simplified Method to figure the taxable and tax-free parts. If your annuity starting date is before Nov.ember 19, 1996, you generally could have chosen to use the Simplified Method of the General Rule.”

If you’re already retired and have filed your federal income tax at least once, you know how that applies to you. If you have just retired (or haven’t yet retired), you can find out how it will apply to you by going to

The short story is that part of your annuity will be tax free and part of it won’t. The amount of the tax-free portion depends on your age at retirement. It’s based on actuarial tables that estimate how long you’ll live. And, in recent years, it also depends on whether you have a spouse and, if so, his or her age.

So, what happens if you live longer than the actuarial tables predict? All of your annuity payments from that point forward are taxable. But, what happens if you die before you reach that point? Do the as-yet-untaxed contributions pass on to your spouse in his or her survivor annuity payments? And if you don’t have a spouse, to your heirs in a lump-sum payment. In both cases, the answer is yes.

However, there’s a wrinkle that almost no one is aware of. While Congress changed the law to reduce the government’s outlays and increase its income, it didn’t change the way OPM pays your annuities. Just as it has always done, OPM begins by returning your own tax-free contributions, and it continues to do so until the pot of money you contributed runs out. Only then will they start sending you the government’s fully taxable money.

When you die, OPM will look at the total annuity they paid out and compare it with the contributions you made to the retirement fund. If the total annuity paid to you exceeds your contributions, there is no unexpended balance. However, if the total is less than that, the non-taxable balance will be transferred either to the survivor spouse’s annuity or paid in a lump sum to the heirs.


There was an error in my last column about computing a FERS annuity.

The correct formula if you are age 62 and have at least 20 years of service is 0.011 x your high-3 x all years of service. The formula is correct in the online version.

Reg Jones was head of retirement and insurance programs at the Office of Personnel Management. Email your retirement related questions to, and view his blog at blogs.federaltimes .com/federal-retirement.


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  1. Retirement benefits surviving spouse

    Would you kindly explain total annuity paid out verses contribution paid out?
    Here’s my wrinkle my spouse had contributed $94,000 over the lifetime of his career (CSRS). He retired in 2014 and was receiving $2700 per year non taxable. He passed away in the end of 2018. So he received approx $10,800 non taxable. OPM IS SAYING that the remainder $83,000 is gone? Shouldn’t that $2700 be paid to me until it’s exhausted? After all he was going to get the pension because of years of service in the USPS the non taxable was additional. Please help !

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