Lump-Sum CSRS or FERS Payment: Federal Employee Retirement Taxes (2025 IRS Guide)
This guide covers “Lump-Sum CSRS or FERS Payment” within federal employee retirement taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.
Adapted from Publication 721 (2025), Tax Guide to U.S. Civil Service Retirement Benefits, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.
Context for these rules
This part of the publication is for survivors of federal employees. It explains how to treat amounts you receive because of the employee’s death. If you are the survivor of a federal retiree, see Part V, later.
Lump-Sum CSRS or FERS Payment
If a federal employee dies before retiring and leaves no one eligible for a survivor annuity, the estate or other beneficiary will receive a lump-sum payment from the CSRS or FERS. This single payment is made up of the regular contributions to the retirement fund plus accrued interest, if any, to the extent not already paid to the employee.
The beneficiary is taxed, in the year the lump sum is distributed or made available, only on the amount of any accrued interest. The taxable amount, if any, generally can’t be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10% rate. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, earlier, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. If the beneficiary also receives a lump-sum payment of unrecovered voluntary contributions plus interest, this treatment applies only if the payment is received within the same tax year. For more information, see Lump-Sum Distributions in Pub. 575.
Lump-sum payment at end of survivor annuity.
If an annuity is paid to the federal employee’s survivor and the survivor annuity ends before an amount equal to the deceased employee’s contributions plus any interest has been paid out, the rest of the contributions plus any interest will be paid in a lump sum to the employee’s estate or other beneficiary. Generally, this beneficiary will not have to include any of the lump sum in gross income because, when it is added to the amount of the annuity previously received that was excludable, it will still be less than the employee’s total contributions.
Any unrecovered cost is allowed as an “Other Itemized Deduction” on the final return of the annuitant.
To figure the taxable amount, if any, use Worksheet D.
Worksheet D. Lump-Sum Payment at End of Survivor Annuity
| 1. | Enter the lump-sum payment | 1. | _____ |
| 2. | Enter the amount of annuity previously received tax free | 2. | _____ |
| 3. | Add lines 1 and 2 | 3. | _____ |
| 4. | Enter the employee’s total cost | 4. | _____ |
| 5. | Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero | 5. | _____ |
The taxable amount, if any, generally can’t be rolled over into an IRA or other plan and is subject to federal income tax withholding at a 10% rate. However, a nonspousal beneficiary making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, earlier, can roll over any taxable amount. In addition, the payment may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if the plan participant was born before January 2, 1936. If the beneficiary also receives a lump-sum payment of unrecovered voluntary contributions plus interest, this treatment applies only if the payment is received within the same tax year. For more information, see Lump-Sum Distributions in Pub. 575.
Example.
At the time of your brother’s death in December 2024, he was employed by the federal government and had contributed $45,000 to the CSRS. His surviving spouse received $6,600 in survivor annuity payments before she died in 2025. She had used the Simplified Method for reporting her annuity and properly excluded $1,000 from gross income.
Only $6,600 of the guaranteed amount of $45,000 (your brother’s contributions) was paid as an annuity, so the balance of $38,400 was paid to you in a lump sum as your brother’s sole beneficiary. You figure the taxable amount of this payment as follows.
Worksheet D. Lump-Sum Payment at End of Survivor Annuity—Example
| 1. | Enter the lump-sum payment | 1. | $ 38,400 |
| 2. | Enter the amount of annuity previously received tax free | 2. | 1,000 |
| 3. | Add lines 1 and 2 | 3. | 39,400 |
| 4. | Enter the employee’s total cost | 4. | 45,000 |
| 5. | Taxable amount. Subtract line 4 from line 3. Enter the result, but not less than zero | 5. | 0 |
Voluntary contributions.
If a CSRS employee dies before retiring from government service, voluntary contributions to the retirement fund can’t be used to provide an additional annuity to the survivors. Instead, the voluntary contributions plus any accrued interest will be paid in a lump sum to the estate or other beneficiary. The beneficiary must generally include any interest received in income for the year distributed or made available. However, if the beneficiary is the employee’s surviving spouse (or someone other than the employee’s spouse making a transfer described under Rollovers by nonspouse beneficiary under Rollover Rules in Part II, earlier), the interest can be rolled over. See also Rollovers by surviving spouse under Rollover Rules in Part II, earlier.
The interest, if not rolled over, is generally subject to federal income tax withholding at a 20% rate (or 10% rate if the beneficiary isn’t the employee’s surviving spouse). It may qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option if:
The plan participant was born before January 2, 1936;
Regular annuity benefits can’t be paid under the retirement system; and
The beneficiary also receives a lump-sum payment of the regular contributions plus interest within the same tax year as the voluntary contributions.
For more information, see Lump-Sum Distributions in Pub. 575.
Using the guidance
Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.
Sources and further reading
- Publication 721 (2025), Tax Guide to U.S. Civil Service Retirement Benefits: Rules for Survivors of Federal Employees — Lump-Sum CSRS or FERS Payment — Internal Revenue Service; 2025 edition.
The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.