One of the components of federal retirement policy that continues to be one of the most misunderstood is known as the “lump-sum option,” also known as the “alternative kind of annuity.” Even though it is no longer commonly offered, a significant number of workers getting close to retirement still seek it.
The “three-year recovery rule” that had been in existence before the introduction of the lump-sum option was given the boot. Following this policy, retirees were exempt from paying taxes on their annuity payments for up to three years. During that time, they received a sum equivalent to the amount they had contributed to the federal retirement fund, which was money that had already been subject to taxes. For most retirees, the tax-free period lasted for around one-half of that amount of time due to practical considerations.
In the first iteration of the lump-sum option, retirees were allowed to withdraw upon retirement an amount that was deemed to be equivalent to the total amount of their contributions. In exchange, they agreed to accept an actuarial reduction in their annuity based on the typical lifespan of someone of that age. After its introduction in 1986, the choice was not only widely accessible but also highly used. However, since it attracted a lot of attention from the people who controlled the budget for the federal government, it was discontinued on October 1, 1994, for everyone, except those who were afflicted with a medical condition that had a prognosis of death within the next two years.
Even though everyone who is now eligible for this choice has a substantially lower life expectancy, those suffering from life-threatening illnesses still have the option to choose the lump sum and have their annuity actuarially decreased using the same life expectancy method. On its website, the Office of Personnel Management provides a list of medical problems that automatically qualify for the alternative form of an annuity when supported by medical proof. This list is available to anybody interested in applying for the alternative form of an annuity. Other factors are evaluated on an individual basis and may be taken into consideration.
Even though it has been several years since that modification, a significant number of workers who are getting close to retirement are still preparing based on the assumption that they would have access to a lump amount. In many instances, this may be because they entered government service about the same time as the initial design of the lump-sum payment and still seem to have that notion in their heads.
Those who require a large amount of money upon retirement for a specific reason, like making a significant purchase, might consider taking a lump-sum withdrawal from their Thrift Savings Plan.
Contact Information:
Email: [email protected]
Phone: 2129517376
Bio:
M. Dutton and Associates is a full-service financial firm. We have been in business for over 30 years serving our community. Through comprehensive objective driven planning, we provide you with the research, analysis, and available options needed to guide you in implementing a sound plan for your retirement. We are committed to helping you achieve your goals. Visit us at MarvinDutton.com . Tel. 212-951-7376: email: [email protected].
