The Office of Personnel Management automatically withholds federal tax from an annuity at the rate the person established as an employee. For example, if you are having federal income tax withheld from your regular salary at the married with two dependents rate, OPM will apply the same rate to your annuity.
After your annuity is established and you receive your Civil Service account (CSA) number and OPM PIN, you may change the withholding rate electronically by accessing the OPM Services Online Web site or calling the OPM automated phone system. Or, if you choose, you may fill out and mail a Form W-4P to OPM (be sure to write your CSA number on it).
However, you do not need to wait until after retirement. If before retirement you know that you wish federal income tax withheld at a different rate than currently withheld from your salary, you may submit, at least one month prior to your retirement effective date, a Form W-4 to your local payroll office, or through an online service your agency may provide.
If you’ll be receiving a large lump sum payment for annual leave when you retire, you should consider its effect on your tax liability. Taxes are applied to lump sum payments in the year in which you receive the money. An employee retiring September 30th could incur a larger tax burden by collecting almost a full year’s salary plus a large lump sum payment for unused annual leave.
IRS Publication 721, which may be obtained free of charge by calling 1-800-Tax-Form (829-3676), explains how your annuity is taxed.
OPM does not automatically withhold state income tax. If you wish state income tax withheld from your annuity, you may provide the state-equivalent of Form W-4P with your retirement package. Or, after receipt of your CSA number and PIN, you may go to the OPM Services Online website or call their automated phone system, and make your state tax withholding electronically. Not all states participate in this program, however.