Federal Employees Retirement System (FERS) Refund

[FrugalMD]

Hi all, I have a question regarding a FERS refund. I've done some research but would like to hear (read) the opinion of somebody that has a bit more experience than me on this. My SO worked a federal job for a little over a year and has now switched to a non-federal job.  While my SO worked her first job, she had to contribute to this retirement system called FERS. Now that she switched jobs, we would like to take this money and use it. We would like to make sure that no taxable event is triggered by doing so.

I got most of the information from this website: https://www.opm.gov/retirement-center/fers-information/former-employees/

As I understand it, there are two components of the FERS, there's the contribution (what's taken from your paycheck) which is after-tax and there's the interest on that money which is pre-tax. For the pre-tax portion, we are just going to roll it over to her TSP which I'm sure is a non-taxable event. For the contribution portion, since it is after-tax, my understanding is that I can just ask for a check to be sent to us and we can use this money for whatever and will NOT have to pay any taxes because it is after-tax money. What confuses me is that on the form that we need to fill (Standard Form (SF) 3106) on the after-tax section, there is an option to "Withhold 20% Federal Income Tax from amount rolled over to Roth IRA". Why would you want 20% to be withheld if you already paid taxes on it? 

In conclusion I would like to make sure that the after-tax portion can be refunded to us via a paycheck without this triggering any taxes. Thank you.

[tagteam]

I'll page @Critter-3 

[VolvoGirl]

I read that link.  The withholding is only for the taxable part (the interest).  You will have to ask them if you can just take out the contribution part and rollover the pre-tax interest.   I don't think you can get it on a "paycheck"  it will just be a regular check or direct deposit to your bank.  Then in January you will get a 1099R  to enter into your tax return even if it is not taxable.    @dmertz 

[dmertz]

The law requires that a minimum of 20% be withheld on the taxable portion of a distribution that is eligible for rollover.  That's why you have no option to decline the 20% withholding when you receive a check for the interest.  The only reason I can see that someone would actually want 20% withheld for from the nontaxable portion would be if they had under-withheld earlier in the year.  They could then complete the rollover of that portion, if that is their intent, by substituting other funds.

Most people would decline the option to withhold taxes on the after-tax portion and would deposit that portion into a Roth IRA as a rollover.  Gains in the Roth IRA will be tax-free once the Roth IRA is qualified and the amount rolled over could be taken out at any time free of tax and penalty.  In other words, they save the money in a Roth IRA until needed.  Of course there is no point in rolling over to a Roth IRA nay portion that you need to spend immediately.