Ask The Experts: Retirement

By Reg Jones

Alternative annuity and taxes

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Q. Years ago, at a retirement seminar, an instructor said that if a retiring employee has a debilitating or terminal illness, they can retire and be paid a lump sum equal to all of the payments they made into CSRS. There is a reduction to the annuity for this payment. Any credence to the statement? If it is true, is the lump sum taxable immediately? If taxable, does the retiree get to take a 10 percent tax write-off for each year he collects an annuity, as regular retirees?

A. What you are referring to is the alternative form of annuity. It allows employees with a life expectancy of less than two years to receive a lump-sum payment of the contributions they have made to the retirement system.

To find out which conditions provide prima facie evidence of a life-threatening condition, go to www.opm.gov/retire/faq/glossary.asp. Since the lump-sum payment would be a return of retirement contributions, which have already been taxed, there wouldn’t be any tax consequences.

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