Federal employee buyout (VSIP) taxes: VERA, deferred resignation and TSP

OPM describes a VSIP as a lump-sum payment of up to $25,000. The amount is the lesser of the severance pay you would have received or an amount your agency sets, up to that limit.

• It is wages. OPM says the payment is reduced by federal and state income tax, Social Security and Medicare, as appropriate.
• Withholding may be too low. IRS Publication 15 lets employers withhold a flat 22% on supplemental wages paid separately from regular pay. If your top bracket is higher, you owe the difference when you file.
• Timing. The payment is taxed in the year you receive it. A separation late in the year can push the payment into January and the next tax year.
• Repayment. If you accept paid federal employment, including a personal services contract, within 5 years, you must repay the entire VSIP before your first day back.

VERA. Voluntary early retirement is open to employees age 50 with 20 years of service, or any age with 25 years, when the agency has authority. OPM says there is no FERS annuity reduction for retiring under VERA before 55. Part of each annuity payment is a tax-free return of your contributions; the rest is taxable income.

Deferred resignation program (2025). OPM said participants kept full pay and benefits through September 30, 2025. That pay was salary and appears on your 2025 W-2. Eligible participants could also take VERA.

Annual leave payout. A lump sum for unused annual leave is taxable as wages in the year you receive it.

• Age 55 rule. If you separate during or after the calendar year you turn 55, TSP withdrawals are generally not subject to the 10% early withdrawal penalty. Qualifying public safety employees can use age 50, or 25 years of service.
• IRAs are different. The age 55 separation exception does not apply to IRAs. Rolling the TSP into an IRA before you need the money gives it up.
• 20% withholding. An eligible rollover distribution paid to you has 20% federal withholding. A direct rollover to an IRA or another plan has none.
• Still taxable. Traditional TSP withdrawals are ordinary income. Qualified Roth TSP distributions are not.

A VSIP and leave payout are wages, so your state of residence taxes them with the rest of your pay. DC, Maryland and Virginia each have their own rules for retirement income, which start to matter once annuity and TSP payments begin.

Before year end:

• Add up wages, the buyout, the leave payout and any TSP withdrawals for the year.
• Compare total withholding to your projected tax.
• Close any gap with an estimated payment or extra withholding. See quarterly tax planning.
• Time TSP withdrawals across tax years where it lowers the total.

Best for: federal employees taking VSIP, VERA or a deferred resignation, and those planning TSP withdrawals in the year they leave.

1. Free initial consultation. Tell us your separation date, the offers you have and your TSP plans.
2. Fees quoted upfront, in writing. Transparent, fair fees before any work starts.
3. Projection. We project federal and state tax for the separation year and the next.
4. Plan. Withholding, estimated payments and timing of TSP withdrawals.
5. File. We prepare and file the returns. See federal employee tax services.