Lump-Sum Payment: Federal Employee Retirement Taxes (2025 IRS Guide)
This guide covers “Lump-Sum 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
If you are eligible, you may choose an alternative form of annuity. If you make this choice, you will receive a lump-sum payment equal to your contributions to the plan and a reduced monthly annuity. You are eligible to make this choice if you meet all of the following requirements.
You are retiring, but not on disability.
You have a life-threatening illness or other critical medical condition.
You don’t have a former spouse entitled to court-ordered benefits based on your service.
If you aren’t eligible or don’t choose this alternative annuity, you can skip the following discussion and go to Federal Gift Tax, later.
Lump-Sum Payment
The lump-sum payment you receive under the alternative annuity option generally has a tax-free part and a taxable part. The tax-free part represents part of your cost. The taxable part represents part of the earnings on your annuity contract. Your lump-sum credit (discussed later) may include a deemed deposit or redeposit that is treated as being included in your lump-sum payment even though you don’t actually receive such amounts. Deemed deposits and redeposits, which are described later under Lump-sum credit, are taxable to you in the year of retirement. Your taxable amount may therefore be more than the lump-sum payment you receive.
You must include the taxable part of the lump-sum payment in your income for the year you receive the payment unless you roll it over into another qualified plan or an IRA. If you don’t have OPM transfer the taxable amount to an IRA or other plan in a direct rollover, tax will be withheld at a 20% rate. See Rollover Rules, later, for information on how to make a rollover.
.OPM can make a direct rollover only up to the amount of the lump-sum payment. Therefore, to defer tax on the full taxable amount if it is more than the payment, you must add funds from another source. .
The taxable part of the lump-sum payment doesn’t qualify as a lump-sum distribution eligible for capital gain treatment or the 10-year tax option. It may also be subject to the 10% additional tax on early distributions if you separate from service before the calendar year in which you reach age 55, even if you reach age 55 in the year you receive the lump-sum payment. For more information, see Lump-Sum Distributions and Tax on Early Distributions in Pub. 575.
Worksheet B.
Use Worksheet B (near the end of this publication) to figure the taxable part of your lump-sum payment. Be sure to keep the completed worksheet for your records.
To complete the worksheet, you will need to know the amount of your lump-sum credit and the present value of your annuity contract.
Lump-sum credit.
Generally, this is the same amount as the lump-sum payment you receive (the total of your contributions to the retirement system). However, for purposes of the alternative annuity option, your lump-sum credit may also include deemed deposits and redeposits that OPM advanced to your retirement account so that you are given credit for the service they represent. Deemed deposits (including interest) are for federal employment during which no retirement contributions were taken out of your pay. Deemed redeposits (including interest) are for any refunds of retirement contributions that you received and didn’t repay. You are treated as if you had received a lump-sum payment equal to the amount of your lump-sum credit and then had made a repayment to OPM of the advanced amounts.
Present value of your annuity contract.
The present value of your annuity contract is figured using actuarial tables provided by the IRS.
If you are receiving a lump-sum payment under the alternative annuity option, you can write to the address below to find out the present value of your annuity contract.
Internal Revenue ServiceAttn: Actuarial Group 2
TE/GE SE:T:EP:RA:T:A2
NCA-629
1111 Constitution Ave. NW
Washington, DC 20224-0002
Example.
David Brown retired from the federal government in 2025, 1 month after his 55th birthday. He had contributed $31,000 to his retirement plan and chose to receive a lump-sum payment of that amount under the alternative annuity option. The present value of his annuity contract is $155,000.
The tax-free part and the taxable part of the lump-sum payment are figured using Worksheet B, as shown in the completed worksheet. The taxable part ($24,800) is also his net cost in the plan, which is used to figure the taxable part of his reduced annuity payments. See Reduced Annuity, later.
Worksheet B. Lump-Sum Payment for David Brown See the instructions under Alternative Annuity Option in Part II of this publication.
| 1. | Enter your lump-sum credit (your cost in the plan at the annuity starting date) | 1. | $ 31,000 |
| 2. | Enter the present value of your annuity contract | 2. | 155,000 |
| 3. | Divide line 1 by line 2 | 3. | 0.20 |
| 4. | Tax-free amount. Multiply line 1 by line 3. (Caution: Don’t include this amount on line 6 of Worksheet A in this publication.) | 4. | $ 6,200 |
| 5. | Taxable amount (net cost in the plan). Subtract line 4 from line 1. Include this amount in the total on Form 1040, 1040-SR, or 1040-NR, line 5b. Also, enter this amount on line 2 of Worksheet A in this publication | 5. | $ 24,800 |
Lump-sum payment in installments.
If you choose the alternative annuity option, you will usually receive the lump-sum payment in one installment. The overall tax treatment is explained at the beginning of this discussion.
How to report.
Add any actual or deemed payment of your lump-sum credit (defined earlier) to the total for Form 1040, 1040-SR, or 1040-NR, line 5a. Add the taxable amount to the total for Form 1040, 1040-SR, or 1040-NR, line 5b, unless you roll over the taxable part to your traditional IRA or a qualified retirement plan.
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 Retirees — Alternative Annuity Option — Lump-Sum 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.