VOLUNTARY CONTRIBUTION PROGRAM
CSRS employees are the only group with the opportunity to create a large Roth account at will by using the Voluntary Contribution Program. CSRS and CSRS Offset employees may use the Voluntary Contribution Program (VCP) to quickly create a funded Roth IRA. Few Federal employees take advantage of the VCP, but CSRS employees have the chance to use the VCP in a process that will create a Roth IRA with completely tax-free earnings, regardless of income.* This incredible possibility stems from the Pension Protection Act of 2006 and subsequent amendments that allow for unique distribution options of the VCP.
The benefits of a Roth IRA have mainly to do with taxation. Post-tax money invested in a Roth grows tax-free, an enormous long-term benefit which sets the Roth apart from traditional IRAs. Also, unlike traditional IRAs, Roth IRAs do not have required minimum distributions (which begin at age 70.5), making them great vehicles for estate planning. Click here to read more in about Roth IRAs.
The Voluntary Contribution account was created to supplement an employee’s retirement annuity. The money grows at a steady, but modest, interest rate and enhances the employee’s pension after retirement, either by a lump sum withdrawal or by conversion into an annuity at retirement.
The Pension Protection Act of 2006 with subsequent amendments allows for section 401 plans (which include the VCP) to be transferred directly into a Roth IRA. Unlike the average investor who has to use an existing IRA or 401(k) that has no basis, federal employees can use the VCP as a vehicle for quickly creating a substantial Roth IRA with minute tax implications. To accomplish this task, you can make some simple OPM-accepted form modifications. This is a tremendous opportunity that may or may not continue in future years.
Ten percent of a CSRS employee’s lifetime “basic pay” (wages that are susceptible to retirement contributions) can be deposited into the VCP account and then converted into a Roth IRA this year.
Assume lifetime earnings of at least $1,000,000:
Your Roth can then grow tax free for as long as you like. Since the money deposited into the VC was after-tax money, the basis in the conversion will not be taxed. This situation is unique to CSRS and CSRS Offset employees, as only they have the ability to open a VCP account.
This great opportunity does come with its own degree of difficulty. The process outlined above, though simple in theory, is actually quite complicated and even the smallest mistake may have large financial consequences. For example, earnings on the funds while in the VC will be taxable at transfer, unless rolled into the TSP. Also, there can be no outstanding service deposits or re-deposits prior to creating a VCP account. For these reasons (among others), it is advisable that the employee seeks the counsel of a financial planner familiar with the nuances of federal benefits and tax law before attempting this.
* See IRS guidelines for tax implications.