Eligible Employees Should Consider the CSRS Voluntary Contribution Program (VCP)- Part II
Edward A. Zurndorfer–
This second of four columns discussing the CSRS Voluntary Contribution Program (VCP) examines withdrawal options from a VCP account. The first column discussed which CSRS and CSRS Offset employees are eligible to participate in the VCP, interest paid on VCP contributions, limits on VCP contributions and how contributions can be made.
There are two withdrawal options for a VCP account: (1) an additional annuity; and (2) a lump-sum payment of contributions and accrued interest.
The additional annuity is calculated as follows: Each $100 in a VCP account – this includes both principal (VCP contributions) and accrued interest – provides an additional CSRS annual annuity of $7 plus $0.20 for each full year the CSRS/CSRS Offset employee is over age 55 at the time the annuity begins. The following two examples illustrate:
Example 1. A CSRS employee is age 60 at retirement and has $120,000 in his VCP account. At age 60 each $100 purchases $8 a year of an additional annuity. This is because:
60 years minus 55 years equals 5 years
$0.20 times 5 years equals $1
$7 plus $1 equals $8 of additional annuity purchased per $100 of VCP contributions and accrued interest
With a $120,000 VCP account balance, the amount of the additional CSRS annuity is equal to:
$120,000/$100 = $1,200 x $8 = $9,600 per year.
Note that the $9,600 VCP annuity is in addition to the CSRS annuitant’s regular annuity.
Example 2. If a CSRS employee retires at age 70 and has a VCP account balance of $500,000, then the VCP annuity is:
$500,000/$100 = $5,000 x $10 = $50,000 per year.
Any VCP annuity continues to be paid as the CSRS/CSRS Offset annuitant continues to live. Also, once the VCP annuity begins, there are no cost-of-living adjustments (COLAs) applied to the VCP annuity as there is to the regular CSRS annuity.
The other VCP account withdrawal option is a lump-sum refund of contributions and accrued interest. With this option, the VCP account owner is paid a refund of all of their voluntary contributions plus accrued interest. This may be done at any time before the VCP account owner retires. Once a VCP account owner is paid such a refund, the account is closed. The account owner cannot open another VCP account and make VCP contributions unless he or she is separated from civil service for more than three calendar days and then reemployed in a position subject to CSRS.
A VCP account owner fills out and submits to the Office of Personnel Management (OPM) Form RI 38-124 notifying OPM of what the owner wants to do with his or her VCP account. Part 3 of Form RI 38-124, entitled “Lump Sum Refund of Voluntary Contributions,” is completed to request a lump sum.
In filling out Part 3 of Form RI 38-124, a VCP participant has choices regarding a lump-sum payment. The first choice is whether OPM should pay the VCP refund immediately or to wait to pay the VCP refund on the date that the VCP participant separates for retirement.
The other choice for VCP participants with an account balance of at least $200 is to roll over the contribution portion and interest portion of their VCP account to an appropriate account, as explained below.
· Contributions (after-tax portion, not taxable). This portion of a participant’s account may be paid either directly to the VCP participant (not taxable) or transferred to an Individual Retirement Account (including a Roth IRA) or to an eligible employer retirement plan such as a 401(k) retirement plan.
· Interest portion (taxable). This portion of a VCP participant’s account may: (1) be paid entirely to the VCP participant, with 20 percent federal income tax withholding; (2) be transferred directly to a traditional IRA or to a qualified retirement plan such as a 401 (k) retirement plan with no federal income tax withholding; (3) be transferred directly to a Roth IRA (with 20 percent in federal income taxes withheld at the request of the VCP account owner); or (4) be transferred directly to the VCP participant’s traditional Thrift Savings Plan (TSP) account.
Note that if the interest portion is directly transferred to a traditional IRA, to an eligible retirement plan, or to the traditional TSP, then there is paperwork that the IRA custodian or retirement plan administrator must complete and certify. The paperwork for this certification is page 3 of Form RI 38-124.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.