CSRS Voluntary Contributions

The Civil Service Retirement System has a special component called the CSRS Voluntary Contributions Plan (VCP).

It was designed to allow CSRS to increase the amount of their Federal pension in retirement by paying more money into the system during their career.

But there is another way to use the VCP - a way that very few people know about.

It's why I call the CSRS Voluntary Contributions Plan the best kept secret in CSRS.

First - let's go over the basics of the VCP...

Basics of CSRS Voluntary Contributions

And to be eligible for the VCP, you must not have any temp time or time where you did not pay into CSRS. If you had time where you did not pay into CSRS - you must buy it back before you can be eligible for the VCP.

The money that you put into the CSRS Voluntary Contributions Plan is after-tax money.

While the money is in the VCP, it earns a fixed (but low) interest rate and will not go down in value.

The money you put in has already been taxed - but the earnings you make while the money is in the VCP will be taxed when you take the money out.

How Much Can You Put into the VCP?

This is 10% of your accumulated base pay over your ENTIRE CSRS work history. So if you've been working for the Federal Government for a long time - this could be quite a large amount.

So for easy numbers, let's say you made $50,000 of base pay every year for 20 years as a CSRS. Now of course, your base pay will have changed over the course of your career - but this is just to give you an idea. In our example, you would be able to contribute... (10% of $50,000) = $5,000 ... $5,000 x 20 years = $100,000.

You can choose to contribute money to the CSRS Voluntary Contributions Plan over your working career - or right at the end before retirement.

So, you can put money in during your career or you can write one big lump-sum check before retirement.

Designed to Increase CSRS Annuity

Example of Annuitizing CSRS Voluntary Contributions Plan:

If you had $100,000 in your VCP at retirement, and you chose to annuitize it, your CSRS pension would be increased by $7,000 a year.

So you would receive ($24,000 + $7,000) = $31,000 a year. $31,000 a year works out to be about $2,583 a month.

This is $583 more a month than if you had not put money into the CSRS Voluntary Contributions Plan. But you had to give the Federal government $100,000 to do it.

This is the traditional way the VCP works. This is how the VCP is explained to most CSRS, and understandably, they're not too excited about it.

But there is another way to use the VCP...

The Best Kept Secret in CSRS

What?

Yes - we use the CSRS VCP to help our clients max fund their Roth IRAs.

Most folks would never even think to use the VCP this way. In a way - it's no secret - it's just using the tax laws to our clients advantage.

Let me explain...

First, a bit about the Roth IRA:

Roth IRA Basics

However, if you take the money out after age 59 ½ and you had the Roth IRA open for 5 years - all the money (principal and interest) comes out tax-free.

And I'm a big fan of the words "TAX FREE!"

Transferring your VCP to a Roth IRA

So what do we do?

BEFORE your retire - you write a lump sum check to the VCP. And you also fill out VCP paperwork to transfer your VCP funds into a IRA - BEFORE you retire.

AFTER you retire - the VCP sends a check directly to your IRA. We've now moved the money from one tax-deferred investment to another - so there are no taxes incurred if the transfer is done correctly.

The next step is to convert your IRA into a Roth IRA.

And this is the best part: you have already paid taxes on the amount you deposited into the VCP. So that money (which is usually the largest part) is not subject to taxes when you convert it to a Roth IRA.

The interest you earned on the money while it was in the VCP or an IRA is subject to income taxes the year you transferred it.

Now that it is in a Roth IRA you take on the normal characteristics of a Roth where the interest you earn can grow tax free!

Roth Income Limitations

In other words - if you make 'too much' money - you can't convert money from a traditional IRA to a Roth IRA.

But with proper tax planning, you can still convert the money to a Roth IRA. There are exceptions to these income limits, and a good financial planner will know how to help you with this.

Get Help With This Transfer

Moving money from the CSRS Voluntary Contributions Plan to a Roth IRA is a detailed transaction with a lot of moving parts. One false step could cause immense taxation and penalties that may range from 10% to 50% if done incorrectly.

We have done this transfer successfully for several of our CSRS clients and it is a great way to put big bucks into a Roth IRA.

If you're working with a financial planner - ask them if they have done this type of transfer before.

You don't want to be the first person they try this with. Because if they make a mistake - you will still be responsible for the tax consequences.

Find a professional who clearly understands this process and has done it successfully.

Take Action *BEFORE* Retirement

As a rule of thumb - you should plan to file your VCP paperwork no less than 60 days before your planned retirement date. While we have been able to help clients make this transfer in less time - it becomes difficult the closer we get to your retirement day.

As with all good financial planning - the sooner we start working together - the more options and choices we have.

Is There Someone Who Can Help Me?

Perhaps you understand the basics of your Federal Retirement benefits, but you're looking for someone to help explain how your benefits apply to your personal situation.

Learn more about how a Financial Planner with Federal benefit experience can help you.

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