May 5, 2006Do you want a safe place for your savings that will provide a 4.125 percent rate of return this year with tax-deferred growth? Are you looking for a way to invest more than the annual limit on Individual Retirement Arrangement contributions? Would you want to buy yourself an increase to your CSRS retirement benefit without working longer?
The federal Voluntary Contributions program provides all of the above, if you qualify. To do so, you must:
A Voluntary Contributions account allows an employee to invest after-tax dollars in the Civil Service Trust Fund above the required retirement contributions. Such investments earn tax-deferred interest at a variable rate determined by the Treasury Department each year.
According to OPM, about 13,000 employees have Voluntary Contributions accounts, totaling $20.9 million. Ninety-five percent of withdrawals are lump sum payments.
Enrollees must make contributions in multiples of $25 via check or direct deposit. The amount cannot exceed 10 percent of total base pay received during all of the employee's federal service. In other words, an employee who has earned a total of $750,000 during his or her federal career could contribute as much as $75,000.
Money from this plan can only be withdrawn once and it must be the full amount. Once contributions are withdrawn, no further deposits can be made unless the employee separates from federal service.
Here's a look at how the Voluntary Contributions program stacks up against other options for retirement investments:
|Voluntary Contributions||Thrift Savings Plan||Individual Retirement Arrangements|
|Contributions made by check or direct deposit||Pre-tax contributions, tax-deferred interest||After-tax contributions, tax-deferred interest (if qualified for Roth IRA; tax-free interest)|
|Interest stops accruing on day of retirement||
Contributions made by payroll withholding
||Contributions made by check or direct deposit|
A lump sum deposit of up to 10 percent of lifetime
salary may be made
Interest continues to accrue after retirement, until
|Interest accrues until withdrawal|
|CSRS employees only||
Annual limit on tax-deferred
contributions (In 2006,
$15,000 plus $5,000 catch-up
|Those 50 and older may contribute $5,000 in 2006 and 2007, up to $6,000 in 2008. Under age 50, limit is $4,000 until 2008, then $5,000.|
|One investment choice: CSRS trust fund.||CSRS, FERS, Uniformed Services||Anyone with earned income|
One investment choice: CSRS trust fund.
||Five investment choices plus lifecycle funds||Unlimited investment choices|
Withdrawal options: Transfer interest or interest plus
contributions to IRA. Transfer interest only to TSP. Purchase additional CSRS
annuity with voluntary contributions. Cash out.
|Annuity, cash refund, transfers to IRA or eligible fund, series of monthly payments. Mix and match options. Elect a partial withdrawal.||Unlimited choices|
An employee may elect to receive a lifetime annuity purchased with Voluntary Contributions funds in addition to his or her regular CSRS retirement annuity. Interest stops accruing on a Voluntary Contributions account on the last day of employment. If the money is not withdrawn or transferred to another retirement account, OPM assumes it was invested to increase the CSRS retirement benefit.
Every $100 invested in voluntary contributions brings a $7 increase in the annual CSRS retirement benefit. For every year the employee is over age 55 at retirement, the extra annuity benefit increases by 20 cents. For example, if an employee retires at age 60, voluntary contributions will increase his or her CSRS annuity by $8 per $100 invested each year.
You may elect to receive a reduced amount and provide a survivor benefit for any person you name. The reduction is 10 percent of your voluntary contributions benefit plus an additional 5 percent for each full five years the person you designate is younger than you (with a maximum reduction of 40 percent). The survivor amount is 50 percent of your reduced voluntary contribution benefit.
Let's look at one example:
Voluntary contributions: $30,000
Age at retirement: 65
Increase to CSRS for every $100 = $9 per year
Annuity: $300 x $9 = $2,700 / year or $225 / month The extra voluntary contributions benefit will be included in your regular CSRS retirement benefit payment. The benefit is not increased by annual cost of living adjustments. The reduction to provide a survivor's benefit is permanent, and it will not end even if the person named dies before you. The benefit cannot be transferred to anyone other than the person designated at retirement.
Getting Started Here's how to establish a Voluntary Contributions account prior to your retirement:
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
May 5, 2006