financial planner Stephen Zelcer

Unusual things to know about retiring December 31st

December 31st is always a popular retirement date, but this year, 2022, it’s especially popular – because this year December 31st is also the last day of a pay-period, and last day of the month, and the last day of the leave year – a trifecta!

What’s so important about being the last day of pay period? Leave accrual. Leave is only accrued at the end of a pay-period. If you retire mid-pay-period, you’ll get paid, but you won’t accrue the leave for that period. Retiring Dec 31 allows you to retire at the end of a pay-period, which gets you the final leave accrual for that year.

What’s so important about being the last day of the month? Avoiding “No Mans Land” by being “Deemed Retired” (for FERS only). In order for a FERS employee to receive a pension check for a given month, they need to be “deemed” retired the prior month. In order to be “deemed” retired, they cannot work any day of that month (FERS). If they work one day, they are no longer “deemed” retired for that month, and will only be “deemed” retired in the following month, thus pushing their retirement pay out yet another month.

For example: Imagine two people retire very close to each other – one on Dec 31 and the other on Jan 1. The one who retires Dec. 31 will be “deemed” retired in Jan, and will begin receiving their pension in Feb. However, the one who retired Jan 1 will NOT be “deemed” retired in Jan, but instead will be “deemed” retired in Feb, this pushing their pension to start in March. This means the entire month of January went by without accruing any income. They weren’t working and they weren’t “deemed” retired either – they we in “no-mans land” for the month of January.
As such, for FERS employees, it’s always best to retire as close to the end of the month as possible, so they can minimize “no-mans land.” Retiring Dec. 31 (or the end of any month) completely avoids “no-mans land.”

What’s so important about being the last day of annual leave year? Maximum annual leave payout. The only way for a FERS employee to retire with the maximum annual leave payout is to retire on the last day of the leave year. In most years, however, the leave year ends in early January. If a FERS retires in early Jan, they may have achieved the max leave but they have entered “no mans land” for Jan (see previous point about “no-mans land.”) In 2022, the leave year ends on Dec. 31, thus many Feds will be able to retire with the maximum annual leave payout.

While all the above are reasons to celebrate a Dec. 31st retirement – below are a few unusual considerations about retiring Dec. 31st:

Retiring with an outstanding TSP loan: If you have an outstanding TSP loan when you retire, the outstanding balance will be considered an income distribution in the year you separate (unless you decided to pay it back). If you separate December 31, 2022 with an outstanding TSP balance, that balance will be added to your 2022 income, not your 2023 income.

RMDs kick in that year, assuming you are 72: Federal retirees need to take Required Minimum Distributions (RMDs) from their TSP once they reach the year they turn age 72. However, Federal employees do not need to take RMDs from their TSP at 72 while they are still active federal employees.

What about someone who retires December 31, 2022? Are they considered retired in 2022 or 2023? Will they need to take an RMD for 2022, or did they avoid the 2022 RMD?

Unfortunately, if a 72-year-old (or older) federal employee retires on December 31, 2022 they are considered retired in 2022, and they will need to take an RMD for the 2022 year (they have until April of 2023 to satisfy the RMD), which will be included in their 2022 income.

Annual leave will get paid in the next calendar/tax year: If you retire December 31st, 2022, your annual leave will be paid out in 2023 and will thus be included in your 2023 income. This is not “bad.” Just keep in mind for tax purposes.

FEHB doesn’t go into effect until Jan 1 (the start of the new leave year): If you change health insurance plans during the 2022 open season, the change goes into effect at the beginning of the next leave year – in this case Jan 1, 2023.

This is very relevant for TriCare participants who do not have FEHB but want to preserve access to FEHB in retirement. In order to have access to FEHB in retirement, an employee must have been covered by FEHB for the last 5 years of their federal career AND they must have active FEHB on the date of separation. TriCare only satisfies 1 of those 2 – TriCare counts toward the 5-year requirement, however TriCare does not satisfy the 2nd requirement, that FEHB be active on the date of separation. So, if a TriCare participant who doesn’t have FEHB, enrolls in FEHB this 2022 open-season, they will not have active FEHB on the date of separation and thus cannot access FEHB in retirement.

The above unusual considerations, as you can see, are unusual, having very limited and specific applications. For most people these unusual consideration don’t really outweigh the above Trifecta, thus December 31, 2022 still remains an attractive retirement date.

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