What Is IRS Publication 721?

The Internal Revenue Service produces the document called Publication 721: Tax Guide To U.S. Civil Service Retirement Benefits. It delineates and updates the income tax rules each year for individuals who have retired from federal service. In other words, it is the tax guide to U.S. civil service retirement benefits provided by the IRS each year.

Understanding IRS Publication 721.

IRS Publication 721: Tax Guide To U.S. Civil Service Retirement Benefits provides detailed information on income tax rules for individuals who have retired from federal service and their survivors. It covers the current and updated tax rules regarding federal service retirees, survivor benefits, thrift savings plans, rollovers, federal estate taxes, and a worksheet for calculating annuity benefits.

Key Takeaways

  • IRS Publication 721 is the tax guide to civil service retirement benefits.
  • The Internal Revenue Services publishes Publication 721 annually and details information about tax information for retirees from federal services.
  • While some of the annuity benefits represent a return of contributions and are tax-free, the remainder is taxable.
  • Beneficiaries must compute the amount that is taxable using one of two methods (Simple Method or General Rule) depending on when the annuity was established.
  • Publication 721 also spells out the options for federal service workers that leave the workforce or need to make other changes to their annuities.

U.S. Civil Service Retirement Benefits are paid out under one of two systems: the Civil Service Retirement System (CSRS) or the Federal Employee Retirement System (FERS). Part of the annuity benefits are a tax-free recovery of contributions to the CSRS or FERS. The remainder is taxable and subject to federal withholding.

For annuities starting after November 18, 1996, recipients must use the Simplified Method to figure the taxable and tax-free parts. For annuities starting before November 19, 1996, recipients may use either the Simplified Method or the General Rule. The starting date of the annuity is indicated on the annuity statement from the Office of Personnel Management. Publication 721 details these differences.

Publication 721 Examples

Publication 721 also delineates the options for employees and retirees who leave federal service or otherwise need to make changes to their annuity plans. For instance, federal employees have the option of a Thrift Savings Plan (TSP), with similar savings and tax benefits many private sector employers offer through 401(k) plans. Employees can make a tax-deferred contribution to their plan balance as a paycheck deduction. The TSP also offers a Roth TSP option, and contributions to this type of balance are made after tax, so distributions from the account are tax free.

As with many IRS documents, various stipulations change from year to year, so it is imperative that all those affected by this section of the tax code refer to the latest version.

Employees who leave federal government service or who transfer to a job not under the CSRS or FERS and who are not eligible for an immediate annuity, may elect to receive a refund of the money in their CSRS or FERS retirement account. This refund will include both regular and voluntary contributions made to the fund, plus any payable interest. While the contributions are not taxed, the interest is taxable unless rolled over into a qualifying plan, such as an IRA.