If you’re getting ready to retire, or considering leaving public service, there’s a good chance you have a balance of unused leave. You may have the option to cash-out this leave, but you'll still have to pay the taxes on the extra income.
Luckily, some employers allow you to roll over leave into your DCP account or towards future health care costs. Your employer must already be participating in DCP. Talk to your employer about what is available. See the list of employers who offer DCP.
Sick leave could be transferable to a VEBA* account for future health care expenses or cashed-out into your DCP account.
Vacation leave could be cashed-out to DCP.
You can choose DCP Roth, pretax, or both for your contributions. But you can’t put in more than the IRS will allow. For 2025, you can contribute up to $23,500 annually to your DCP account ($31,000 if you’re age 50 or older). You don’t have to contribute the full balance. You could apply some of the leave to DCP and cash-out the rest.
*Note: If your participation in VEBA (Voluntary Employees’ Beneficiary Association) is funded by sick leave cash-outs, those funds may not be directed to DCP. Please check with your payroll or human resources department to verify VEBA participation and how it is funded.
Tax advantages
If you have a large balance of leave, taking it as a cash payout could be enough to put you in a different tax bracket. So, putting that money into a tax-deferred account like DCP where it can be invested could be a great option. Consult a tax advisor for information about federal income taxes on your contribution.
What else should I consider?
Depending on your financial situation, you may not need the money right now. Some people like the option of being able to set the money aside so they won’t be tempted to spend it. They might think: “if I have that money in my bank account, I might waste it. So, I want to put the money in an account where it’s going to be invested for my future.”
How to contribute your leave to DCP
Complete the following steps at least 30 days before your leave cash-out is paid.
First, you’ll need this information from your employer’s payroll office:
The dollar amount of your leave cash-out eligible for DCP deferral (after applicable withholdings such as Social Security and Medicare). Be sure to deduct federal income tax for Roth contributions and confirm the dollar amount before you decide to contribute all or a portion of your leave to DCP.
The date the leave cash-out will be paid.
Next, complete the DCP Lump Sum or Leave Cash-Out Deferral form and submit it to DRS.
The amount you put on this form will be withheld. Confirm the amount with your employer so you have enough leave to cover your contribution request.
The form can take 10 business days to process. You and your employer will receive a confirmation email when the deferral is set up.
To update the deferral amount, submit a new form. Requests or changes made less than 30 days before the pay date may not be processed in time.
Prefer to listen? Tune in to the podcast episode
In this episode, our guest Malia shares insights on transferring leave balances into the Deferred Compensation Program (DCP), offering potential tax savings and investment opportunities.