When you retire you’ll receive a lump sum payment for your unused annual leave. Depending on how much you cash in and you salary level, that payment can be quite substantial.
Most employees can carry up to 30 days (240 hours) of annual leave from one leave year (which is not exactly a calendar year) to the next and the maximum rate of leave accumulation per year, for those with 15 or more years of service, is one day (8 hours) per biweekly pay period. So, the practical maximum cash-in amount is around 50 days or so—assuming they were carrying the maximum into their last year of employment, used little in that last year, and retired late in the year.
Note: SES and certain other senior employees may carry 70 days forward and they earn annual leave at the maximum regardless of their years of service. Separate earning and carryover rules apply to postal employees depending on their pay system, which in turn depends on their bargaining status.
Not only will you get a lump-sum payment when you retire but those unused hours of annual leave will be projected forward. As a result, the hourly rate of pay you’ll receive for each hour of leave will be the one you would have gotten if you were on annual leave during all that time.
Therefore, if you retire toward the end of the year, any hours that cross over into the next leave year will be valued at the new year’s pay rate (remember that pay raises are effective as of the start of the first full pay period of the new year, not January 1). As a result, at least some of the leave will be cashed in at a pay rate higher than the rate applying when it was earned. A nice little bonus!
If you would have received a within-grade increase during that lump-sum payout period, it will not increase your hourly rate. To receive credit for that, the increase would have to have taken place no later than the day on which you retired.
As a rule, the only deductions that will be taken out of your lump-sum payment are for federal taxes (and state and local taxes, if applicable). However, if you are subject to garnishment of your wages or owe a debt to the federal government, deductions will be taken out for them, too.
At the end of the calendar year in which you retire, the gross amount of your lump sum payment will be reported on your W-2. Because of that tax liability, the later in the year you retire, the higher those taxes would be. That’s because the lump sum will be piled on top of the salary you earned before retirement. Therefore, leaving at the beginning of a calendar year would limit the tax impact, because the lump sum payment would be added to the reduced income from your annuity.
One final note. If you are reemployed in the federal service before the expiration of the period of annual leave you were paid for, you’ll have to pay back that portion of the money which represents the time between the date you are reemployed and the expiration of the lump-sum period. That repayment will result in those hours being credited to your new annual leave account.