Even as the number of employees covered by CSRS continues to decline, interest in the Voluntary Contributions Program – which is only open to CSRS employees – continues to grow. Go figure. Anyhow, I’m here to sort the matter out for those of you who are either in the program now (and are bewildered) or are interested in signing up.
The VCP was authorized by the Congress over 60 years ago as a way to allow federal employees to buy additional annuity when they retire. Under the law, employees are permitted to contribute up to 10 percent of their total lifetime earnings while working for the government and earn interest on their deposits, which is compounded annually. At retirement they are free to purchase additional annuity.
Here’s how that additional annuity is computed. If you retire at age 55 or earlier, you will get $7 of additional annuity for every $100 in your account. So, if you had $5,000 in your account, you could buy $350 of additional annuity. For every year you are over age 55, the amount you can buy goes up 20 cents. So, if you retired at age 60, your $100 would buy you $8 of additional annuity. Oh, and you can even purchase a survivor annuity for whomever you chose. The good news is that any annuity you purchase will continue to be paid for the rest of your life (or your survivor’s). The bad news is that these annuities won’t be increased by COLAs.
Alternatively, you can close out your account and take a penalty-free withdrawal. In fact, you are free to close your account at any time, with the understanding that once you do so, you won’t be able to reopen it unless you leave government and return at a later date to a CSRS-covered position.
Truth to tell, there weren’t many takers for the program during the first 40 years. It wasn’t until 1985 that it got a shot in the arm. That’s when the government started paying market interest rates on VCP accounts. And that first one was a whopping 13 percent! And this year’s interest rate of 4.125 percent isn’t too shabby.
These days few of those who participate in the VCP plan use it to buy additional annuity. Instead they use it as one more place to put their excess earnings after they have contributed the maximum amount to their TSP accounts.
A word about taxes. If you take your money out, taxes are only due on the accumulated interest. However, you can roll either the interest or the entire amount of your VCP account into an IRA and postpone the payment of taxes on that interest to a later date.
For more information about the VCP program, go to your personnel office and ask for a copy of OPM’s Retirement Facts 10: Voluntary Contributions Under the Civil Service Retirement System or download a copy by going to www.opm.gov/asd/pdf/ri83-010.pdf.