(Post updated 3/29/2013 based on comments from GubMints reader Brad- see Comments)
I’ve received many direct and search inquiries regarding how to perform a Military Service Credit Deposit- So with much fanfare, here is the
GubMints Comprehensive Military Service Credit Deposit Guide
Note: This entire guide assumes:
1) You are covered under FERS, not CSRS’ and
2) All of your Military Service took place after 1956.
(both reasonable assumptions).
If you go to the OPM website, here’s the terse guidance they provide on how to perform a Military Service Credit Deposit:FERS Military Service Credit Deposit Military Service Credit for Military Service performed after 1956- To receive FERS credit for military service performed after 1956, you must pay a deposit. The amount of the deposit is: Dates of Service Amount of Deposit Due
Through 12/31/98 3% of military basic pay
1/1/99 through 12/31/99 3.25% of military basic pay
1/1/00 through 12/31/00 3.4% of military basic pay
1/1/01 to the present 3% of military basic pay
You must make the deposit payment for your post-1956 military service before you stop working for the government. It is paid to your employing agency. You should ask your local servicing personnel center for help in determining whether to make this payment. They can provide personalized assistance because they have your employment records.
Sounds pretty simple, doesn’t it?
Well, there’s more to it than that. Here’s the Gouge / Dirty Purples / Poop Sheet on Military Service Credit Deposit:
The rules are that you must make your Military Service Credit Deposit (aka FERS Military Buyback) within 2 years of commencing Federal Employment, or you must pay additional interest penalties.
First, you need to figure out how many years you will be able to purchase for credit at the ‘back end’ of the FERS retirement calculation. You’ll need to fill out form RI20-97 and include:
- DD 214 (at a minimum), plus
- Pay Stubs from each promotion, or W-2’s from each rank
- (Optional) Pay Stubs or W-2’s from Service Academy time (if you went to USNA/USMA/USAFA/USCGA).
- (Optional) Transcript from Service Academy (if you went to USNA/USMA/USAFA/USCGA).
*** Sidebar *** Service Academy graduates CAN perform a Military Service Credit for their midshipman/cadet time in to the FERS Annuity system. At the time of this writing, you will receive credit for your Academy time
on the BACK end (receiving end) of your Annuity, but the Academy time you purchase/buy back will not count as time in service on your Service Computation Date for Leave and or Service Computation Date for RIF.
Here’s a sample RI20-97 Request for Credit Computation:
When you mail your calculation request, I also recommend filling out a spreadsheet showing DFAS what you think the right answer is:
Second, after you’ve filled out the request for calculation you should receive a calculation response letter back from DFAS within about 60 days. This response letter will show what you will owe to FERS to perform you Military Service Credit Deposit. Let’s assume in your case the answer for 11 years of base pay (academy plus active duty) is $7,163:
Third, figure out if this is a good deal or not. In most cases, it will be. You can ballpark this by doing a reverse-annuity calculation. Here’s how to ballpark it:
– Use $100k as your high-3 finishing salary average
– Calculate your ‘Military Deposit’ years (ie 11 years of Active Duty/Academy time Bought Back)
– Your annual annuity payout- EXCLUSIVELY Attributable to your Military Service Credit for 11 years of Active Duty will be
(.01) x 11y x 100K/year = $11k/year FERS Annuity Payment (in retirement).
– Now figure out what the Present Value Factor is for this annuity payout. You can use any online annuity calculator you would like, or you could just ballpark it and multiply the annual payout by 25 (using the “4% Safe Withdrawal Rule”). In our case the Lump-Sum equivalent of a $11k/year payout for life is 25 x $11,000 = $275,000.
– Let’s say you’re age 35 and you’ve got 25 years until you see FERS annuity payments at age 60. Using the HP-12C app on your smartphone or the RATE function in Excel/OpenOffice: 25 [n], 7,163 (-) [Enter] [PV], 255,000 [FV]; i = 15.71 Percent (!)
This is your Rate of Return ‘Bogey’. If you can find something that returns better than 15.71 percent, backed by the federal government, then you should purchase that hot stock/bond/investment property with your $7,163 before you buy in to FERS with your Military Active Duty years. Can’t find anything that guarantees that rate of 15.71 percent? Then beg, borrow, or steal money wherever you can find it to perform your Military Service Credit Deposit!
Fourth, if a Military Service Credit Deposit is a good deal to you (believe me- it will be!), Request the Military Service Credit Deposit in writing by filling out and SF-3108 with your local HR Office.
Fifth, you’re now On the Clock. You’ll have to figure out what the source of funds will be for your Military Service Credit Deposit. My preferred order would be:
- (Taxable) Bank or Brokerage Acct (Write a Check)
- A series of Payroll Deductions (but deductions should be complete before the interest penalty kicks in)
- Roth IRA CONTRIBUTION BASIS (NOT Earnings- you pay a penalty on withdrawing Roth Earnings before age 59 1/2)
- Take a TSP loan (you can roll all or some of an existing 401k or Traditional IRA in to your TSP as a source of ‘principal’ to borrow against)
- Take a loan from a consumer/equity line
- Early withdrawal from an IRA/401k/TSP
The last bullet is a last resort, as you will pay a 10 percent federal penalty, plus income taxes, plus any state early withdrawal penalties on IRA/401k early withdrawal amounts.
Finally, if you don’t have to schedule allotments to make your Military Service Credit Deposit, wait until you have about 60-90 days before your interest penalty to make your deposit. This is sort of like waiting until April 15th to file your taxes when you owe the IRS money (no sense in paying Uncle Sam early if there is no penalty for waiting). This gives you time to save up for the Military Service Credit Deposit, or at least allow funds to continue earning interest in your savings or brokerage account. In my case, I waited until 90-days before the 2-year window just to ensure there were no administrative snafus regarding my Military Service Credit Deposit:
It’s all done. A few weeks after you’ve made your deposit, go in to EBIS or your Payroll Agency online HR database and check your Service Computation Date. In case you didn’t already know, you have 3 Service Computation Dates. What we are checking here is that Service Computation Date (RIF) and Service Computation Date (Leave) and match your deposit. Service Computation Date (Civilian) will not change- that is locked to the day you walked in to your Agency HR Office and commenced employment as a Federal Civilian.
*** Note that if you bought back Service Academy time, once again your Academy Time purchased will
be credited on the BACK end (annuity payout) of your application for FERS retirement, NOT the front end (adjust ing your Service Computation Date). ***
That’s quite the effort, but worth it! How long do you think you should keep your records for your Military Service Credit Deposit? You guessed it- FOREVER.
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