A while back we looked at the issue of ‘deposit service’ for CSRS employees. Now we will consider what human resources folks refer to as ‘re-deposit service’. Re-deposit service refers to service where you withdrew your contributions when you left federal service and did not re-deposit them when you later returned.
This article is for CSRS employees and the few (very few) FERS employees (often known as FERS transferees) who had withdrawn contributions from CSRS and not re-deposited them when they returned to federal service as a FERS employee, or elected to transfer from CSRS to FERS during one of the two open seasons. The rest of you FERS readers can move on to Ralph Smith’s latest article on The Value of the F Fund in Your Retirement Planning.
When deciding whether or not to re-deposit money, the most important thing to consider is when did the service for which you received a refund end? If it ended before 10/01/90, breathe a sigh of relief. If it ended 10/01/90 or after, pay it.
It is unlikely that CSRS employees would have withdrawn contributions on 10/01/90 or after, but if they did the refunded service will not count in the computation of their annuity. I guess the good news is that the service will count for their eligibility to retire.
Let’s look at an example. Fred withdrew ten years worth of CSRS contributions when he left on 01/01/91 to open an 8-track repair studio. Within a year he realized he had made a bad decision and returned to federal service. This allowed him to remain in CSRS. However, he had invested much of the money he withdrew in the business and was unable to re-deposit it. He will work for a total of 30 years and will retire in roughly 2010 with a high-three salary of $65,000. If he does not deposit the withdrawn contributions (and interest), his annuity will be $23,562.50 rather than the $36,562.50 it would have been had he made the re-deposit. My advice to Fred – repay it, even if you have to take out a loan.
Now, let’s look at the situation that most people who are facing a CSRS redeposit find themselves in. That is, the period of service for which they received a refund of contributions ended before 10/01/90. In this case, the service counts for both their eligibility to retire and in their retirement computation. If they do not make the redeposit, their annuity will be reduced by an amount determined by their age at retirement and the amount they owe. What they owe is the amount of money they withdrew plus interest.
Not to confuse you, but there is another date to remember. If you took your money out before 10/01/82, you are being charged interest at a flat 3% rate. If you took the money out 10/01/82 or later, the interest rate varies (in one year it was 13%). Since the amount you took out, plus interest will determine the reduction to your annuity, those who took the money out before 10/01/82 will face a smaller reduction.
Now, let’s say that Fred took his money out in 1981, and that, by 2010, the amount he will owe will be $32,000. When he retires in 2010, Fred will be 58 years old. The "Present Value Factor" chart used by OPM gives a 58 year old a reduction factor of 197.6. That amount is divided into the $32,000 that Fred owes to determine how much his annuity is reduced.
His monthly annuity is reduced by $162, or $1944 a year. That leaves Fred with $34,618.50 per year in annuity. Disregarding opportunity cost (remember, that’s what we could make by investing the money) Fred would break even when he reaches his life expectancy.
Perhaps the best thing to do if you have a redeposit is to ask your human resources office to compute how much you owe and what the effect will be on your annuity if you do not pay it back.