Your annual leave lump-sum payout at federal retirement
All those hours of annual leave you banked don’t vanish when you retire — they convert to a single lump-sum check, often $10,000 to $30,000 or more. But it’s not as simple as “hours times pay rate.” The payment is projected forward as if you stayed on the payroll, so a January retirement can capture the new year’s pay raise on part of it; it’s taxed as supplemental wages with a flat 22% withholding; and the timing of your last day interacts with use-or-lose forfeiture and your annuity start date. This guide explains exactly how the payout is calculated, taxed, and timed in 2026 — with a calculator to size yours.
1. What it is
When you leave federal service — retirement, resignation, or termination — you receive a lump-sum cash payment for all accrued and accrued-but-unused annual leave to your credit. It represents every day you would have worked had you stayed on the payroll. The payment is direct-deposited to your usual account, though it can take anywhere from four to six weeks to several months while your agency audits your leave records.
This applies even if you separate before you’re eligible for an immediate annuity — deferred and postponed retirees get the lump sum too.
2. How many hours you can cash out
At retirement you’re paid for all unused annual leave — not just the carryover ceiling. The math stacks two pieces:
| Employee type | Carryover ceiling |
|---|---|
| Most domestic employees | 240 hours (30 days) |
| Employees stationed overseas | 360 hours (45 days) |
| Senior Executive Service / senior-level | 720 hours (90 days) |
Veterans who don’t draw a military pension generally get full credit for active-duty time toward their accrual rate, which can put them in the 8-hour-per-pay-period category sooner — meaning a bigger annual accrual and a larger potential payout.
3. How it’s calculated
The core formula is simple:
The applicable hourly rate is your basic pay plus locality pay, and it can include certain other pays you’d have received on leave — law enforcement availability pay, administratively uncontrollable overtime, supervisory differentials, regularly scheduled FLSA overtime, and similar. It does not include retention incentives, Sunday premium pay, or a within-grade increase you hadn’t yet earned.
4. The projected-forward raise
Here’s the feature most people miss. Your leave isn’t just cashed at today’s rate — it’s projected forward across the workdays you’d have used it (holidays count as workdays). If a pay raise takes effect during that projected period, the hours after the raise date are paid at the higher rate.
Federal pay adjustments take effect in early January. Retire at the end of December or very early January with a big leave balance, and a chunk of your projected leave period falls after the raise — so that portion pays out at the new, higher rate. The extra amount from the raise sometimes arrives as a separate, later payment.
5. Estimate your payout
Enter your unused annual leave hours and your hourly rate. The calculator shows the gross lump sum, the upside if a January raise applies to the projected period, and a rough net after supplemental withholding and FICA.
Annual leave payout estimator
Gross = hours × rate. Net applies 22% federal supplemental withholding + 7.65% FICA (state tax not included). Estimate only.
6. How it’s taxed
The payout is fully taxable ordinary income in the year received. As supplemental wages it gets a flat 22% federal withholding for 2026 (37% on any amount over $1M), plus Social Security (up to the wage base) and Medicare taxes, plus state tax where applicable.
What’s not withheld is notable: no FEHB, FEGLI, FEDVIP, or FLTCIP premiums, and no TSP or retirement contributions come out of the lump sum. One planning angle: a large payout can bump your taxable income for the retirement year, so retiring early in the calendar year — when you’ve earned less salary that year — can keep the combined total in a lower bracket.
7. December vs. January
This is the timing puzzle behind the annual surge of retirement claims every December and January. The leave year ends in early January (the 2026 leave year runs through January 9, 2027 for most). Retiring near that boundary maximizes the balance you cash out — and an early-January exit can also capture the pay raise on part of the projected payout.
Your FERS annuity doesn’t begin until the month after you separate, and your first COLA follows the annuity start. A January retirement can push your first annuity check — and first COLA — later than a December one. See December vs. January for the full trade-off; the bigger leave payout is one factor among several.
8. What’s not included
Two important exclusions:
- Sick leave is never cashed out. Instead, unused sick leave converts to service credit that increases your pension — a different (and often more valuable) benefit.
- The payout doesn’t boost your annuity. Annual leave hours can’t be used to increase your length of service or your high-3. It’s cash, not pension.
One more caution: if you take the lump sum and then return to federal service as a reemployed annuitant before the projected leave period ends, you must refund the overlapping portion and your leave account is recredited.
9. Frequently asked questions
How is the annual leave lump-sum payment calculated?
Your agency multiplies your unused annual leave hours by your applicable hourly rate, which includes basic pay plus locality pay and certain other pays such as law enforcement availability pay. The key wrinkle is that the leave is projected forward as if you had stayed on the payroll: the hours are spread across future workdays (holidays count as workdays), and if a pay raise takes effect during that projected period, the hours after the raise are paid at the higher rate. So a retiree who leaves in early January can have part of their payout calculated at the new year's higher pay rate. The payment does not include retention incentives, Sunday premium pay, or a within-grade increase you hadn't yet earned.
How many hours of annual leave can I cash out?
At retirement you're paid for all unused annual leave to your credit, not just the carryover ceiling. Most domestic employees can carry over up to 240 hours from one leave year to the next, and on top of that you keep whatever you accrue during your final year, which can approach 208 hours. That means a typical maximum near 448 hours. Employees stationed overseas can carry 360 hours and Senior Executive Service members up to 720, so their potential payouts are larger. Because you keep the current year's accrual, timing your retirement near the end of the leave year maximizes the balance you cash out.
How is the annual leave payout taxed?
The lump-sum payment is fully taxable as ordinary wages in the year you receive it. As supplemental wages, it's subject to a flat 22 percent federal income tax withholding for 2026 (37 percent on amounts over one million dollars), plus Social Security tax up to the wage base, Medicare tax, and any state income tax. Notably, the usual paycheck deductions do not come out: no FEHB or FEGLI premiums, no TSP contributions, and no retirement contributions are withheld. Because a large lump sum can push your total income into a higher bracket for the retirement year, many employees retire early in the calendar year when their salary income for that year is smaller.
Should I retire in December or January to maximize my leave payout?
Timing near the end of the leave year is the classic move. Retiring at the very end of the leave year lets you combine the prior year's carryover (up to 240 hours) with a full year's fresh accrual, producing close to the maximum payout. Retiring in early January, before the new leave year's use-or-lose forfeiture date, can also let part of the projected payout be paid at the new year's higher rate if a January pay raise applies. The trade-off under FERS is that your annuity doesn't begin until the month after you separate, so a January retirement can push your first annuity payment and first COLA later. Weigh the larger lump sum against the annuity timing.
Is unused sick leave paid out like annual leave?
No. Unused sick leave is never paid out as cash. Instead, it's converted into additional creditable service that increases your pension computation. Annual leave and sick leave are treated completely differently at retirement: annual leave becomes a taxable lump-sum check, while sick leave becomes extra service time in your annuity formula. Also note that your annual leave payout does not count toward your length of service or your high-3 average salary for the pension calculation, so it boosts your cash at retirement but not your monthly annuity.