Lump Sum Option No Longer Available To Retirees

Lump Sum Option No Longer Available To Retirees

When it comes to federal retirement policies, the most misunderstood one is the “lump-sum option.” Also known as the alternative form of annuity, employees close to retirement tend to ask for it. However, they are surprised to learn that the program is no longer available and hasn’t been available for several years.


This option was developed to replace the “three-year recovery rule,” where people retiring would not have to pay taxes on annuity payments for three years while they recovered the contributions paid into the federal retirement fund. This was money that had already been taxed. This tax-free period tended to last half the three years.


With this lump-sum option, people could take out the amount they felt was equal to their contributions and accepted the drop in their annuity using the average life expectancy. Created in 1986, the option was quite popular. However, the federal government caught wind of it and decided to get rid of it on Oct. 1, 1994.  The only exception was for people dealing with a medical condition that could kill them within two years.


Since that time, both the annuity’s tax-free and taxable portions have been combined.


While people with life-threatening conditions can choose the lump-sum, they’re electing to have their annuity decreased based on the life expectancy formula. Of course, by definition, anybody that chooses this option has a shorter life expectancy.  A list of medical conditions that automatically qualify for the lump sum annuity was published by the Office of Personnel Management – with medical documents supporting said condition.


Other conditions are looked at on a case-by-case basis.


While this was changed years ago, there are still some people who have made plans with it. People who need a lump sum at their retirement should consider the Thrift Savings Plan’s lump-sum withdrawal, but it is mostly taxable.


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