If you are a CSRS or CSRS-Offset employee who doesn’t owe any deposits or redeposits to the retirement system, you are free to invest up to 10 percent of your lifetime federal civilian earnings in the Voluntary Contributions Program (VCP) and earn market rate interest. Yes, that’s right. Your lifetime federal earnings. While the money you deposit is taxable, the interest it earns is tax deferred, just like it would be in a regular IRA. You can contribute to that account at any time and in any amount, as long as it’s in multiples of $25. And your payments are made directly to OPM.
When the Voluntary Contributions Program became law in 1939 – yes, I said 1939 – its purpose was to allow federal workers to increase their retirement annuities. Back then, annuities were small and the Congress thought that every little bit would help. However, because interest rates were so low, few employees ever contributed to it. Only in 1985, when the government began paying market rates, did the idea begin to catch on.
If you open a VCP account and decide to use the proceeds to buy additional annuity, here’s how it will work. At retirement every $100 in your account will earn you an additional $7 per year of annuity. You get 20 cents more for each full year you are over age 55. So, if you were 62 years old at retirement, each $100 would buy $8.40 of annuity. And if you had $10,000, it would buy you $840.
Of course, there are some pluses and minuses to consider. Here’s the biggest minus: you would receive no cost-of-living adjustments (COLAs) on your VCP annuity payment. But here are a few pluses. If you purchase additional annuity at retirement, you can also make a survivor election. And, unlike a survivor election under CSRS, you can name anyone to be your beneficiary. That’s because your election doesn’t require spousal consent, nor is it subject to garnishment. Further, you’ll receive the annuity you purchased as long as you live. This isn’t like a checking account where the payments stop when the money runs out.
Now, if you’re not interested if purchasing additional annuity, you can do what so many of your fellow employees are doing. They invest their money and let it grow. Of course, the best place to do that is to maximize your contributions to the Thrift Savings Plan and shovel in any catch-up contributions you’re eligible to make. But after that, let me give you four reasons why the VCP may be a good investment option for you.
First, the money can be withdrawn at any time and for any reason. Second, it can be rolled over into a standard IRA (the tricky part of this process is to make sure that the IRA you put it in can discriminate between the already taxed portion–your contributions– and the interest; anyone who is eligible for a VC payment will receive an election form that describes the rollover options in greater detail). Third, you can earn the same amount of interest whether you invest a little or a lot. And you’ll know what the interest rate is before you send in your money. That’s because interest rates are set for the year ahead. In 2005 that rate is an attractive 4.375 percent. Fourth, it’s one of the few no-risk opportunities around. That’s because VCP investments are backed by the government.
If you want to participate in the Voluntary Contribution Program, download a copy of SF 2804, Application to Make Voluntary Contributions. Just go to www.opm.gov, click on Federal Forms in the lower left hand corner, then click on Standard Forms and click on the 2804. Fill it out and take it to your personnel office. They’ll send it to the OPM, which will then help you set up an account.