What Happens to My Retirement Contributions if I Die Soon After I Retire?

By on August 20, 2015 in Q&A, Retirement with 16 Comments

Q: I understand (and even sort of agree) why the government excludes only a small portion of my pension income from taxes. I am getting that pension for the rest of what I hope to be a long lifetime. My question is if that life is NOT so long; suppose for instance I died this year after being retired for only a little over two years. I have only had taxes excluded on maybe $12-$14K. The remainder of my original $220K contributions are still “in the pot” so to speak. If my wife and I elected no survivor annuity, does she get that remainder without paying additional taxes on it, since it has already been taxed? Same question in the case where there is no spouse and the remainder goes to my estate – is it taxed again even though I have paid taxes on it once?

A: Your beneficiary will not pay taxes on any refund of retirement contributions, as you paid the taxes when you paid them. In your case, where you did not elect a survivor annuity, any contributions remaining at the time of your death will be distributed according to your SF-2808 (Designation of Beneficiary).

But, as you suspected, there is a catch. As I discussed in my article, the IRS views you as recouping your already taxed contributions back little-by-little, based on your life expectancy for tax purposes. OPM, however has different rules when looking at refunds, You are viewed as recouping your contributions dollar for dollar from the beginning for refund purposes. Basically, in OPM’s eyes, you will have recouped contributions in no longer than three years from your retirement.

I agree, it isn’t fair, but it’s the rules.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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