Ah, the good old days! If you retired in the early 1980s, your annuity payments began with a return of your own contributions to the retirement fund. Because that money had already been taxed, it meant that you could receive tax-free payments until your contributions ran out. That usually took around18 months. Then you started receiving Uncle Sam’s money, which was 100 percent taxable.

That arrangement was wiped out when Congress decided that federal retirees should receive a mix of their own contributions and government monies, and that the exact proportion should be determined actuarially. In other words, the longer your projected life span, the less of your own money you would receive each month; the shorter it was, the more you’d receive. Naturally, the amount that wasn’t made up of your contributions would be taxable in the year you received it.

The next big change came when the Federal Employees Retirement System was created in 1986. That law allowed retiring employees to decide if they wanted to receive their contributions in a lump sum and have their annuity actuarially reduced.

For retiring federal employees, this alternative form of annuity (AFA) was an irresistible deal. If you chose the AFA and invested the money wisely, you could more than make up for the actuarial reduction in your annuity. Because the reduction only ranged from 5 to 15 percent, the younger you were when you took the lump sum payment, the easier it was to offset the reduction.

For any retiree with a lot of CSRS service, the money involved wasn’t anything to sneeze at. For most of their careers they had been contributing 7 percent of their salary (7.5 percent for special category employees). So, the lump sum could easily be as high as $50,000 or more.

So popular was the AFA during the first two years of its existence that it called attention to itself in the federal budget. So, those in Congress who wanted to save the provision changed the law to spread out the lump sum payment over two years. The only exception was that anyone retiring with a life-threatening condition resulting in a life expectancy of less than two years could still receive the lump sum in one payment. Unfortunately, that compromise only lasted until October 1, 1994. That’s when the AFA was eliminated for everyone except those suffering from a life-threatening condition.

To further sour the milk, a court ruled that those original changes in the tax code also applied to the AFA. As a result, even those with a life-threatening condition were required to treat the lump sum payment as a mixture of their own contributions and the government’s money. The only good news for those with life-threatening conditions was that the taxable portion of the AFA could be rolled over into a traditional IRA.

What a shame that such a great idea came to ruin through budget pressures and court action.