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Federal Employees News Digest : June 10, 2013
T his second of three columns discussing redeposit service for CSRS and FERS employees discusses whether it makes financial sense for CSRS and CSRS Offset employees to make a redeposit for refunded service ending before March 1, 1991. The first column discussed the cost of a full redeposit, including: (1) the total refund- ed CSRS contributions received by the employee and (2) interest. The first column also noted the fact that if a CSRS or CSRS Offset employee does not make a full redeposit, then the employee will still get credit for the refunded years for retirement eligibility and in the computation of his or her CSRS annuity. If an employee does not make a full redeposit for refunded service ending before March 1, 1991, then the employee's CSRS annuity will be actuarially reduced by an amount equal to the amount of the redeposit (refunded contributions plus accrued interest) divided by a present value factor, as shown in the chart on this page. The present value factor used corresponds to the employee's age in the year of retirement. The following example illustrates the effect of not making a redeposit of refunded CSRS service prior to March 1, 1991: Lawrence, age 58, entered federal service in May 1980 as a CSRS employee. In June 1990 Lawrence left federal service and withdrew all of his CSRS contributions. He reentered federal service in April 1993 as a CSRS Offset employee. Lawrence currently owes a redeposit (withdrawn CSRS contributions plus interest charges) of $21,520. Since Lawrence receives credit for retirement eligibility purposes for his 10 years of withdrawn CSRS contributions, and since Lawrence is older than age 55 with 33 years of service, he can retire in 2013. But if Lawrence does not make a full redeposit of $21,520, his CSRS annuity will be reduced by $100 as shown below. $21,520 (amount owed)/215.2 (present value factor for employee age 58) = $100 The $100 monthly reduction in the annuity will be permanent. There are two ways of weighing the advantage of making a redeposit. In Lawrence's case, consider the following: • If Lawrence were to make a full redeposit of $21,250, thereby preventing a $100 monthly reduction to his annuity, he would "get his money back" after 215.2 months, or 17.93 years. In other words, if Lawrence lives to age 76, he would get his money back. If Lawrence is currently not in the best of health and is not expected to live long, then he should not make a redeposit. • If Lawrence did not make a full redeposit and were instead to invest the $21,520 he owes, what would be the minimum after-tax investment return he would have to get on his $21,250 investment to make up for the$1,200 he is losing annually on his CSRS annuity? Answer: 5.6 per- cent. On a before-tax basis and assuming Lawrence is in a combined federal and state income tax bracket of 33 percent, this means getting a minimum average investment return over 18 years of 8.3 percent. There is no certainty this could occur over the next 15 to 20 years. Another question that needs to be addressed for making a redeposit is whether the employee has money available to make the redeposit. The money has to come from a non-retirement account---for example, a savings account or a money market account. Proceeds from a TSP General Purpose Loan could be used to make a redeposit. CSRS or CSRS Offset employees who owe a redeposit should also be aware that they may not participate in the CSRS Voluntary Contribution Program (VCP) until they have made a full redeposit. Those employees who work beyond 41 years and 11 months of service will continue to have a 7 percent (CSRS) or 0.8 percent (CSRS Offset) contribution withheld from their salaries. But the Office of Personnel Management will withhold any redeposit due from these "excess" contributions. Those CSRS or CSRS Offset employees who want to make a redeposit should obtain Form SF 2803, downloadable from www.opm.gov/forms. The employee needs to com- plete the front of the form and submit it to his or her person- nel or human resources office. That office will fill out the back of the form and sub- mit it to OPM's Retirement and Insurance Service Office. The employee will then be notified as to how to make payment. An employee should not file Form SF 2803 if the employee is within six months of retirement. OPM will give the retiring employee the opportunity to make the redeposit repayment at the time of retirement and before the retirement application is adjudicated. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor When employees should make a redeposit: Part II June 10, 2013 Vol. 62, No. 45 7 Visit us on the Internet at www.FederalDaily.com Present Value Factors (CSRS) Retirement Age Present Value Factor Retirement Age Present Value Factor 45 271.6 61 199.0 46 267.9 62 193.3 47 264.2 63 187.7 48 260.3 64 182.0 49 256.8 65 176.2 50 253.1 66 170.5 51 248.9 67 164.6 52 244.7 68 158.9 53 240.3 69 153.2 54 235.5 70 147.5 55 230.7 71 141.7 56 225.7 72 135.7 57 220.4 73 129.9 58 215.2 74 124.0 59 209.9 75 118.1 60 204.6 76 112.2 Source: OPM CSRS and FERS Retirement Manual Handbook
June 3, 2013
June 17, 2013