A person is allowed to contribute up to 10% of their lifetime federal salary to a voluntary contributions account. Image: Doglikehorse/Shutterstock.com
How can a current federal employee sidestep the annual IRA contribution limit and put tens of thousands of dollars into IRAs? How can they purchase a level payment single premium immediate annuity with a 9% payout rate for a 65 year old?
The primary requirement is that they are covered by the Civil Service Retirement System (CSRS). CSRS, unlike FERS, has a provision that allows employees to contribute additional, after tax, money to the “Voluntary Contributions Program” (VCP). In addition to being covered by CSRS or CSRS Offset, they would need to have no outstanding deposits or redeposits to CSRS. A FERS transferee who already has a VCP account can keep it, but they are not allowed to make any additional contributions.
A person is allowed to contribute up to 10% of their lifetime federal salary to a voluntary contributions account. That can add up to a significant dollar amount; in many cases reaching six figures. Contributions must be made in multiples of $50, but can be any amount, as long as the total does not exceed the 10% limit. Contributions can be made at any time before retirement.
A CSRS employee who was aware of the voluntary contributions program for years, can have already created a substantial balance in their VCP account. Those who became aware later in their career still have the opportunity to contribute – all it requires is the financial means to do so. If one has a substantial nest egg in a taxable account, or perhaps their Aunt Bertha died and left them a nice inheritance, they could contribute money from those sources. The only requirement is that the contributions must have been made before the employee has retired.
Voluntary contributions earn interest at a rate that is announced each year by the Department of Treasury. The rate is the same for 2022 and 2023 at 1.375%. That wouldn’t have been a bad rate for most of 2022 but seems a little scanty for 2023. In the past, the rate has been as high as 13% (1985) and 11.125% (1986). Rates of less than 10% have been the norm since 1985, with the current 1.375% being the lowest.
Though a participant is allowed to take money from their VCP account prior to retirement, most wait until retirement when they have three choices.
1) They can elect to purchase an additional annuity:
– The payout rate of the annuity is 7% for a 55 year old, increasing by 0.2% for each additional year of age (e.g., a 60 year old would have an 8% payout rate and a 65 year old would see 9%).
– It is a level payment annuity. That means that there will be no cost-of-living increases associated with it.
– Survivor annuities are available, and the cost is based on the age difference between the VCP participant and the designated survivor. Anyone can be named a survivor.
2) They can elect to take the money and spend it foolishly (or wisely).
3) They can roll the money into an IRA. The already taxed contributions can be rolled into a Roth IRA and the earnings on the contributions can go into a traditional IRA.
If there are any CSRS employees who have not heard of the Voluntary Contributions Program and want to participate, they should contact their HR office. If the HR office hasn’t heard of this program, refer them to Chapter 31 of the CSRS and FERS Handbook for Personnel and Payroll Offices.
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