Reg Jones Expert's View

One of the little known features of federal employment is the Voluntary Contributions Program, an investment opportunity that is only open to CSRS-covered employees. The VCP was authorized by the Congress nearly 70 years ago as a way to allow federal employees to buy additional annuity when they retire.

As a CSRS employee, you are permitted to contribute up to 10 percent of your total lifetime earnings while working for the government and earn interest on your deposits, which is compounded annually. In bad economic times like these, the rates are pretty good. In 2008 you would have earned 4.75 percent and in 2009, 3.875. This year you’d be making 3.125 percent. And the interest earned is tax deferred. Not too shabby.

At retirement you’ll be able to purchase additional annuity with that money. This is a particularly attractive option for CSRS employees who have over 41 years and 11 months of service. That additional annuity, like unused sick level credit, isn’t subject to the 80 percent limit on earned annuities.

Here’s how that additional annuity is computed. If you retire at age 55 or earlier, you’ll get $7 of additional annuity per year for every $100 in your account. So, if you had $5,000, you could buy $350 of additional annuity annually. For every year you are over age 55, the amount you buy goes up 20 cents. So, for example, if you retired at age 60, your $100 would buy you $8 of additional annuity annually. You can even purchase a survivor annuity for whomever you chose. There are no restrictions on this.

Any annuity you purchase will continue to be paid for the rest of your life (and your survivor’s, too, if you elect to provide for one). The bad news is that VCP annuities won’t be increased by cost-of-living adjustments. Of course, that’s no big deal this year, because the 2010 COLA was zero. And it will probably be zero next year, too.

If you don’t want to purchase additional annuity at retirement, you can close your account and take a penalty-free withdrawal. In fact, you can close your account at any time. However, if you close your account, you won’t be able to reopen it unless you leave government and return at a later date to a CSRS-covered position.     

These days few of those who participate in the VCP program buy additional annuity with their money. Instead they consider it to be a good place to put their excess earnings after they have contributed the maximum amount to their TSP accounts.

 

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 a regular IRA and postpone the payment of taxes on that interest to a later date. Or you can pay taxes on the interest and roll it all into a Roth IRA.

For more information about the VCP program, go www.opm.gov/forms/pdfimage/RI83-10.pdf and download a copy of OPM’s Retirement Facts 10: Voluntary Contributions Under the Civil Service Retirement System.