Basis for FERS-FRAE contribution?

[Anonymous]

So as a new fed hire I just learned about the mandatory 4.4% deduction for FERS. A little pissed about the amount but I know it will still pay off if I stick around long enough. What I can't find anywhere, though, is how they calculate the 4.4%. It is supposed to be after-tax, but how do they do the payroll deduction properly if you tend to have a big refund every year? Would I potentially have to make an adjusted contribution to FERS after I do my taxes??

[Anonymous]

You won't have to change your withholding. "After tax" means that it isn't deductible for federal income tax purposes. They calculate the amount due based on your gross salary. If you make 100,000 a year, your FERS contribution is 4,400. But they take that amount from what is left after you have done your withholding for taxes, unlike, say health insurance or 401k, which is taken from gross salary BEFORE they figure tax withholding. It works like social security or Medicare taxes.

In case you are wondering where all that 4.4% goes, 0.8% of it goes to your FERS employee pension trust. The other 3.6% goes to the CSRS trust for employees hired before 1983 to cover its shortfall.

[Anonymous]

Anonymous wrote:In case you are wondering where all that 4.4% goes, 0.8% of it goes to your FERS employee pension trust. The other 3.6% goes to the CSRS trust for employees hired before 1983 to cover its shortfall.

Wait? Is this true? If it is, it's disgusting.

[Anonymous]

Anonymous wrote:You won't have to change your withholding. "After tax" means that it isn't deductible for federal income tax purposes. They calculate the amount due based on your gross salary. If you make 100,000 a year, your FERS contribution is 4,400. But they take that amount from what is left after you have done your withholding for taxes, unlike, say health insurance or 401k, which is taken from gross salary BEFORE they figure tax withholding. It works like social security or Medicare taxes.

In case you are wondering where all that 4.4% goes, 0.8% of it goes to your FERS employee pension trust. The other 3.6% goes to the CSRS trust for employees hired before 1983 to cover its shortfall.

I don't think I understand! I thought FERS contributions were taxed. That is why the employee contribution portion of the annuity is not taxed later on.

I have a tough time swallowing the 4.4% mainly because I didn't know about it before I was hired, and I definitely would have negotiated harder if I did. I think nobody at my agency understands that all new employees are basically coming in 4% lower than everyone else. I already feel underpaid so this stings. Although when I did the calculations to see what I would get if I stuck around for 25 years it seemed pretty great!

[Anonymous]

It isn't that the contributions themselves are taxed. It is that you are paying the contributions with money that has already been taxed (your salary). Like buying a bagel or a movie ticket or anything else. When you get paid at retirement, a portion of that retirement payment is non taxable because you have already paid tax - not on the contribution directly, but on the salary dollars you used to make the contributions. Just like buying a stock in a normal taxable account, you only pay tax on the gains.

If you stay for many years, the pension will be nice, though not amazing and not as nice as it could have been had you only paid 0.8 percent of it. If you end up leaving before five years, you can get all your contributions back with interest.

[Anonymous]

Anonymous wrote:

Anonymous wrote:In case you are wondering where all that 4.4% goes, 0.8% of it goes to your FERS employee pension trust. The other 3.6% goes to the CSRS trust for employees hired before 1983 to cover its shortfall.

Wait? Is this true? If it is, it's disgusting.

Yep. 5 USC 8423. If the CSRS shortfall is ever somehow covered, then and only then will the extra funds be paid into the FERS trust. But it will just reduce the amount the government pays in.

[Anonymous]

Anonymous wrote:It isn't that the contributions themselves are taxed. It is that you are paying the contributions with money that has already been taxed (your salary). Like buying a bagel or a movie ticket or anything else. When you get paid at retirement, a portion of that retirement payment is non taxable because you have already paid tax - not on the contribution directly, but on the salary dollars you used to make the contributions. Just like buying a stock in a normal taxable account, you only pay tax on the gains.

If you stay for many years, the pension will be nice, though not amazing and not as nice as it could have been had you only paid 0.8 percent of it. If you end up leaving before five years, you can get all your contributions back with interest.

Oh ok, that makes sense!