The voluntary contributions program remains a little-known and even less-used retirement savings vehicle. But given its favorable tax treatment, its guaranteed returns and its choices for withdrawal, the VC program could be a valuable benefit to many late-career federal employees.
A few basics. First, the VC program is only for CSRS or CSRS-Offset employees; those under FERS are not eligible. Second, it has no relation to the Thrift Savings Plan; participation in one does not affect participation in the other. Third, it really does exist; that’s true even though many federal personnel offices still have not heard of it.
For those eligible and able to get their personnel offices to provide them with the needed form to open such accounts (Standard Form 2804), the VC program offers the opportunity to put up to 10 percent of career federal earnings in an individual account that is available to be withdrawn as a lump-sum at any time—either at retirement or before—or drawn out as an annuity after retirement.
The money is invested in government securities that in 2010 will pay 3.125 percent. That’s a fairly low rate historically speaking for the program, but it reflects the generally low interest rates prevailing in the economy as a whole. And it’s substantially above what many other fixed-income investments, such as certificates of deposit or money market funds, are paying.
Like investments in the TSP, VC investments grow tax-free until withdrawn. But unlike the TSP, which allows investments to be made with pre-tax money, VC investments must be made with after-tax money. However, unlike the TSP, which generally requires investments only through biweekly payroll withholding, VC investments can be made at any time and in any amount, up to the lifetime ceiling. Thus, the VC program can be a good vehicle to hold proceeds of an inheritance, an investment gain or other lump-sum of money.