Those federal employees with their eye on maximizing the dollars they can realize at retirement have often asked me whether they should run out their annual leave or receive a lump-sum payment for it. Under the right circumstances, running out your leave would probably yield the higher figure. However, there are a lot of variables at work, not least of which would be finding a boss who was dumb enough to let you do it!
Let’s look at some of those variables. First is the amount of unused annual leave you have to your credit. If it’s more than you are allowed to carry into a new leave year, the date on which you retire would be critical because “use or lose” leave would be lost if you retired after the new leave year begins. And, since unused leave is projected forward, retiring just before the new leave year begins would yield the largest lump-sum payment. (For FERS employees, that would be no later than the last day in December; for CSRS employees, it would be no later than January 3.) However, it’s important to understand that your lump-sum payment will be reduced by the same taxes that are taken out of your pay check. That’s because the payment will be treated as earned income.
On the other hand, if you were permitted to run out your annual leave, you would be accumulating more annual leave even as you used it. For example, if you took 80 hours of annual leave in a pay period, you’d only be reducing your leave balance by 74 hours. That’s because you would have earned six hours during that pay period. Furthermore, during the time you were running out your leave, you’d be increasing both your service credit for retirement computation purposes and your opportunity to sock more tax-deferred money into your Thrift Savings Plan account (and benefiting from Uncle Sam’s additional contribution, for FERS employees). How much the tax-deferral feature would be worth would depend on your tax bracket.
As I hinted at the beginning, this may be nothing more than an academic exercise. It’s a rare boss who will allow an employee to encumber a position, draw a salary, and produce no work for more than a few weeks at a stretch. And, under law, there are none that should. Therefore, if the idea of using up all your annual leave appeals to you, you’ll have to consume it in reasonable bites over a fairly long time span. Would it be worth the effort? That’s a question best left up to you to answer.
