ExclusiveIs Military Retirement Pay Considered A Federal Annuity

Is Military Retirement Pay Considered A Federal Annuity


Potential To Earn Retirement Earlier

NC House passes bill eliminating income tax on military retirement pay

The FERS retirement system can be complex, and a full overview is outside the scope of this article. So we will provide a brief overview and show how your military service can help you achieve full retirement earlier than those who join the civil service without prior military service.

There are several classifications of FERS retirement that impact how and when you can collect your retirement benefits. These are Immediate Retirement, Early Retirement or Deferred Retirement.

Each of these has different requirements based on when you joined the FERS system, your number of years of service, your age at retirement, and other factors.

FERS members must serve a minimum of five years in the civil service to be eligible for any FERS retirement benefits.

The most important factor for former military members to know is that each year of military service credits you buy back adds a year of service credit to your FERS retirement benefits.

Once you have your five years of creditable federal service, your military service credits can help you reach the various retirement milestones more quickly. And of course, each year of additional service increases your FERS pension.

See this article for a full overview of FERS retirement eligibility, and when FERS members can receive a deferred annuity.

How To Waive Your Military Retirement Pay In Favor Of Fers

Do you wish to waive your military retirement pay and get credited for your military service for federal retirement? You will need to contact the Retired Pay Operations Center at least 60 days before your planned retirement.

The waiver can take the form of a boilerplate fax or registered letter starting the following as suggested by the federal government:

I hereby waive my military retired pay for Civil Service Retirement or Federal Employees Retirement System purposes effective . I hereby authorize the U.S. Office of Personnel management to withhold from my annuity any amount of military retired pay granted beyond the effective date of this waiver due to any delay in receiving or processing this request.

Mail your waiver via U.S. postal mail to the following address:

Defense Finance and Accounting ServiceU.S. Military Retirement Pay

Faxed requests of this nature can be sent to 469-6559.

Veterans Administration Disability Compensation

Don’t confuse VA Disability Compensation with Military Disability Retirement Pay. They are two separate animals. The VA uses completely different standards for determining service-connected disability than the military uses for its disability retirement system.

All retiring members who believe they have a service-connected disability can apply for VA benefits prior to, or after retirement. If you are eligible, a service-connected disability is established. While you are required to relinquish military retirement pay on a $1 to $1 ratio in order to receive VA Disability pay, the following benefits accrue as a result of VA compensation:

  • VA compensation is nontaxable
  • VA approved disability gives you a priority admittance to VA hospitals for medical treatment for your disability
  • VA outpatient facilities are available for the treatment of your disability
  • If you die as a result of the service-connected disability, your surviving spouse is eligible for Dependency and Indemnity Compensation from the VA
  • Even a rating by VA of 0% documents your physical condition as service-connected.
  • A rating by VA of 30% or higher allows you to receive additional tax-free allowances for your dependents.
  • Annual cost-of-living increases to your compensation amount.
  • VA disability percentage can be increased, based on a request and approval of reevaluation, resulting in increased tax-free compensation.
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    Unfortunately Some States Aren’t Very Generous When It Comes To Helping Retired Veterans At Tax Time

    If you spent your career in the military, you’ve probably lived all over the U.S. and around the world. But before you put down roots in retirement, find out how much of your hard-earned pension will be taxed. You’ll pay tax to the federal government on military retirement pay that’s based on age or length of service . With state taxes, though, it isn’t always so clear.

    Many states provide special tax breaks for military retirees or for retirement income in general. And, of course, some states don’t even have an income tax. But some other states aren’t so generous when it comes to helping retired veterans at tax time.

    We’ve identified the 10 states with the least-friendly income tax rules for military pensions. These states can tax at least part of a veteran’s pensionand some tax the entire amount. We’ve listed the least tax-friendly of these states first. Take a look.

    • Lowest tax rate: 1%
    • Highest tax rate: 13.3%

    California offers retired military members no way to escape its high tax rates. The Golden State taxes 100% of a resident’s income from military pensions, along with private, local, state, and other federal pensions. This applies to all military pension income received while a retiree is a California resident, regardless of where he or she was stationed while on active duty.

    • Lowest tax rate: 2.59%
    • Highest tax rate: 4.5%
    • Lowest tax rate: 1%
    • Highest tax rate: 6.9%

    Taxation Of Military Retirement Pay

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    In most cases, retired pay is fully taxable. The amount of taxable income is reduced by SBP costs and any waiver for VA compensation or deduction for dual compensation . The amount deducted from your pay for federal withholding tax is based on the number of exemptions you indicate on either your pay data form or your W-4 after retirement.

    State tax withholding is on a voluntary basis and must be in whole dollar amounts. $10 is the minimum monthly amount. Before making your request in writing, you must contact the taxing authority in the state in which you have established residence to determine if you are required to pay state income tax.

    Retired/retainer pay is not subject to FICA deductions, nor is your retired pay reduced when you become entitled to Social Security payments.

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    The Disadvantages Of The Civil Service

    Youll have lots of competition when you apply for a job. The process isnt quick or easy.

    A Federal resume is not the same as a typical corporate resume. Its a lot more comprehensive and requires additional information.

    If youre hired, civil service salaries are set, although there is some room for negotiation. Expect the offer to be at the minimum amount of the appropriate grade.

    While there are no restrictions on applying for civil service positions in other federal agencies, if you are a retired member of the armed forces, you cannot be appointed to a civilian position in DoD within 180 days after retirement, with a few select exceptions.

    You should also know that you will probably be dismissed from civil service if your application is falsified. Also, on your first day, you will take an oath of office. Its similar to the oath you took while on active duty.

    One other thing, all federal jobs require a National Agency Check and some positions require clearances or trust investigations.

    Bottom line: if you serve in the Reserve or National Guard and also work in the federal civil service, then you can take your military service credit deposit and still receive your full Reserve/Guard pension. Youve earned both of them!

    The Benefits Of Serving In The Civil Service After The Military

    The most obvious benefit is that you can augment your retirement with civil service pay after a full military career.

    Compensation packages are excellent and most include regular basic pay raises, a pension plan, health benefits, long term health insurance, dental and eye insurance, life insurance, alternative work schedules, and options to work at home. Some agencies even help pay for student loans and offer other incentives.

    There are only five executive core qualifications when you apply for a position, and they are exactly the same for every position:

    • Leading People
    • Results
    • Building Coalitions

    The Office of personnel management has specific guidance on how to write ECQs, including format and length

    There are two types of job announcements: Merit Promotion and Delegated Examining Unit .

    • Merit Promotion announcements recruit from existing or former civil servants.
    • DEU announcements are used to recruit from the general public. Military personnel and veterans can apply for Merit Promotion announcements under a law called VEOA the Veterans Employment Opportunity Act.

    For many DEU applications, Veterans Preference gives you an advantage because of your veteran status. Veterans with a service-related disability rating from the VA are eligible for additional preferences.

    If the job announcement says relocation expenses will be paid, or similar language, then the agency will pay for some or all of your move.

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    Defined Vs Contribution Retirement Plans

    Qualified and nonqualified plans usually fall either under the defined contribution or benefit plan. And military pensions are not any different.

    A defined contribution plan is a retirement plan where both you and the employer contribute funds that are then invested. These funds enjoy tax advantages, such as tax deferrals until it is time for you to withdraw them. In addition, these plans do not offer a specific amount at retirement. Instead, what you get depends on the performance of investments after subtracting the necessary transaction fees.

    Defined contribution plans are popular because they enable employees to take a more active role in saving for their retirement.

    On the other hand, a defined benefit plan promises you a specified amount of money at retirement. The benefit may be given as an exact dollar amount or calculated based on a specified formula. And the amount may be given as a regular payment, lump-sum or some combination of the two payment methods.

    What You Need To Know About Military Retirement

    Military retirement income could be exempt from South Carolina state income taxes

    Military retirement plans are essentially a percentage of the borrowers active duty basic pay with additional cost-of-living increases factored in over time. How is military retirement pay calculated? According to the Department of Defense, there are generally two ways to determine the base retirement pay for military members:

    • Final pay method, which establishes retired base pay equal to final basic pay according to the Defense Department.
    • High-36 month average method which takes the highest 36 months of basic pay divided by 36. In general, the last three years of military service basic pay is used for this calculation.

    Additional factors can apply in some cases:

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    • High-36 for military members on a retirement plan known as REDUX which is an active duty-only retirement option. In these cases the High-36 multiplier is reduced by one percentage point for each year that the member has less than 30 years of service at retirement. For instance, 20 years of service would equate to a 40% multiplier, according to the DoD.
    • For those on a disability retirement plan, the multiplier may be the higher of 2.5% for each year of service or the disability percentage assigned by the Service at retirement, but disability retirement multipliers are capped at 75%.

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    Qualifying For Military Benefits

    Military veterans may be eligible for tax-free monthly monetary benefits based on their current circumstances, discharge conditions and record of service. While the U.S. Department of Defense offers a variety of benefits to meet health and income needs, three of the most common are disability, veterans and retirement pensions.

    The Role Of Military Service In A Federal Annuity

    Generally, a federal employee must waive military retired pay in order to receive credit for military service in the computation of a federal annuity. The exceptions are:

    * Military retired pay based on a service-connected disability caused by an instrumentality of war and incurred in the line of duty during a period of war, or incurred in combat with an enemy of the United States

    * Military retired pay received under the provisions of 10 U.S.C. 12731-12739 which grants retired pay to members of reserve components of the armed forces on the basis of age and service and

    * Military service not used in the computation of military retired pay.

    To determine whether its beneficial to combine your retired military service with your civilian service, obtain a retirement estimate with and without credit for your retired military service. Second, determine how much the military deposit will be. Once you have this information youll be able to determine if the deposit is beneficial for you. Typically an employing agency will perform this calculation.

    When youre ready to retire, you must submit a waiver of your military retired pay to the appropriate military finance center 60 to 90 days prior to the effective date of your civilian retirement. If you fail to waive your military retired pay, OPM will refund the deposit, with interest if you are FERS, without if you are CSRS.

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    How The Tsp Fits Into Your Retirement

    If youre covered by the Federal Employees Retirement System , the TSP is one part of a three-part retirement package that also includes your FERS basic annuity and Social Security.

    If youre covered by the Civil Service Retirement System or are a member of the uniformed services, the TSP is a supplement to your CSRS annuity or military retired pay.

    Newer Military Members Retirement

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    There is a third retirement system for anyone who joined the military on or after August 1, 1986.

    These individuals are required to make a decision at the 15-year point of their careers. They can elect to participate in the same retirement program above, or they can choose to receive an immediate monetary bonus , and select the “REDUX” system.

    If they elect the “REDUX” system, the factor is determined by taking 2.5% times your years of service then reducing that factor by 1% point for each year less than 30 years. Using the same examples as above, a person with 22 years of active duty service would retire at 47% of the average of their highest 36 months of base pay. The “REDUX” ends at age 62, and the individual then begins to receive their “normal” retirement pay.

    Additionally, folks who elect “REDUX” will have their annual cost of living allowance reduced by 1%. At age 62, those percentage points are added back to the retired pay, however.

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    Taking Advantage Of Veterans Savings Plans

    The federal government sponsors a special veterans savings and retirement plan called the Thrift Savings Plan . The TSP is a defined contribution plan, similar to 401s.

    Established as part of the Federal Employees Retirement System Act of 1986, the plan includes tax incentives and professionally managed funds. Because this account is designed for long-term savings, it carries penalties for early withdrawals.

    Veterans can also choose a Roth-type TSP, which can include contributions from tax-exempt combat pay and can draw interest over a period of years.

    Federal Taxes On Veterans’ Disability Or Military Retirement Pensions

    Benefit Fact Sheet

    Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and Veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income.

    Service members with service-connected disabilities may be eligible for Federal income tax exclusions of Veterans’ benefits and disability pension payments.

    Military Retirement Pay

    Military retirement pay based on age or length of service is taxable and must be included as income for Federal income taxes. The amount a Retiree pays to participate in the Survivors Benefit Plan is excluded from taxable income. For

    Social Security tax purposes, military retirement pay is not considered earned income and no Social Security payroll taxes taxes) are withheld from military retirement pay.

    Military Disability Retirement Pay

    Military Disability Retirement Pay received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces should not be included in taxable income if any of the following conditions apply:

  • You would be entitled to receive disability compensation from the Department of Veterans Affairs if you filed an application for it .

  • Veterans Benefits

    Veterans’ benefits are also excluded from Federal taxable income. The following amounts paid to Veterans or their Families are not taxable:

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    Enrollment In The Brs Depends On When You Joined The Service

    • If you joined before January 1, 2006, you remained in the legacy retirement system.

    • If you joined the service on or after January 1, 2018, you were automatically enrolled in the BRS.

    • If you joined between January 1, 2006, and December 31, 2017, you could stay in the legacy system or enroll in the new one. The last day to enroll in the BRS plan was December 31, 2018.

    Waiving Retirement Pay And Buying Into Fers

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    As described above, service members are permitted to waive their military retirement pay and have the length of their military service added to civilian service time for the purposes of computing the FERS benefit.

    But theres a caveat here waiving your military retired pay is not enough. Service members are required to pay a deposit for prior to separating from your agency in order for it to be creditable in your FERS retirement case, according to the government.

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    When And How You Get Paid

    Unlike active duty pay, retired/retainer pay is only paid once per month. Your net retired/retainer pay should be sent to your financial institution by direct deposit unless you reside in a foreign country, which direct deposit is not available. Your retired pay will be deposited to your account on the first business day of the month following the end of the month.

    Your first payment for retired pay normally will arrive 30 days after your release from active duty, or, on the first business day of the month following the month of first entitlement to pay. In a separate mailing, you will receive a letter which will show you how your pay was computed.

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