Golden Opportunity

I need to apologize upfront to my Federal Employees Retirement System readers this week. I know about 80 percent of government workers now are covered under FERS, but I didn't want to miss an opportunity to share a golden opportunity with my Civil Service Retirement System readers. Both FERS and CSRS employees can save pre-tax dollars in the Thrift Savings Plan, but CSRS employees also have access to another program for saving after-tax dollars called Voluntary Contributions.

I've written about Voluntary Contributions in the past (the last time was in May 2009), but I wanted to devote one more week to this subject since there have been some recent clarifications that I want to bring to your attention.

What It Is

Let's start with a definition: Voluntary Contributions is a savings program open to current employees (and recently retired employees who are awaiting the final processing of their retirement request) covered by CSRS and CSRS Offset. Employees can contribute up to 10 percent of their lifetime federal salaries to this account during their careers. These contributions can be made on a regular basis, sporadically, or all at once. Contributions must be made in multiples of $25.

Putting money into Voluntary Contributions is very similar to making a deposit to a bank account. The money is safe (it is protected by the full faith and credit of the federal government) and earns interest. The 2010 interest rate is 3.125 percent -- the same as in the Civil Service Trust Fund. The interest credited to voluntary contributions accounts is compounded annually on Dec. 31. While you're contributing after-tax dollars, the interest grows tax-deferred and your investment is safe.

Getting Started

To set up a Voluntary Contributions account, you will need an SF 2804 form. You can fill it out online, but the form itself must be printed on paper and submitted to a retirement specialist in your human resources office. The specialist will complete the agency certification section and submit the form to the Office of Personnel Management for you.

If you are planning to retire within the next three to four months, you can include the completed SF 2804 with your retirement application package. If you already have left federal service and are waiting for your retirement to be approved, then you can send your application directly to OPM's Retirement Operations Center at P.O. Box 45, Boyers, Pa., 16017-0045. No agency certification is necessary at this point. If your retirement claim already has been finalized, then you are not eligible to make Voluntary Contributions deposits.

One caveat: If you owe money to the retirement fund for nondeduction service (service that was not subject to civil service retirement withholding, such as temporary service), or refunded civil service retirement contributions, you won't be permitted to participate in Voluntary Contributions unless you pay your deposit, or redeposit the refunded contributions.

Withdrawal Options

You are permitted only one withdrawal from Voluntary Contributions, and it must be for the full amount of the account. The withdrawal is made using form RI 38-124. The form was revised in July to clarify your withdrawal options. Those options are:

• A lump-sum refund either at retirement, or as soon as possible. (Remember, once you make a withdrawal you will no longer be able to contribute unless you have a break in service and are rehired.)
• A rollover option. The interest portion can be paid to you with a 20 percent income tax withholding, or it can be paid directly to your individual retirement account. If the money is going to a Roth IRA, you can choose to have taxes withheld from the interest portion. The interest portion also can be transferred directly to the TSP (which requires form TSP 60). The contributions portion can be paid in a lump sum to you, or sent directly to your IRA. You cannot choose to have some of the funds paid to you and some to your IRA.
• An additional CSRS annuity. If you select this option, then the additional annuity will not include any cost-of-living adjustments. Upon your death, any balance that was not paid to you will be paid in a lump sum to the beneficiary of your CSRS contributions according to your CSRS Beneficiary Designation form SF 2808, or according to the standard federal order of precedence, if no valid beneficiary form has been filed. If you retire at age 55 or younger and do not choose a survivor annuity benefit, then for every $100 in Voluntary Contributions, you will receive an additional $7 per year in retirement benefits. The annuity is payable for the rest of your life. It increases by 20 cents for every year you are older than 55 at retirement.

Why Is This So Cool?

• The interest rate (3.125 percent) is higher than any bank that I know of is paying right now.
• The 10 percent of lifetime salary that can be contributed could add up to more than six figures for some feds. Compare that to an IRA: If you're younger than 50, then your 2010 contributions to a traditional IRA or a Roth IRA are limited to $5,000, or the total of your taxable compensation, whichever is smaller. If you're 50 or older before the end of the year, then you're allowed to contribute up to an additional $1,000.
• There are no income limits for participating in Voluntary Contributions. The amount you can contribute to a Roth IRA depends on your income. To make the full contribution, your modified adjusted gross income must be less than $105,000 if you're single, or $167,000 as a married couple filing jointly. If you earn slightly above those amounts, you might be able to make smaller contributions, which phase out after $120,000 and $177,000, respectively.
• You can transfer your entire Voluntary Contributions account to an IRA and you are not subject to the $5,000 limit, or by your income.

OPM offers a fact sheet on Voluntary Contributions, and provides more detailed guidance in Chapter 31 of the CSRS and FERS Handbook.

Earlier this week, Bob Leins and I discussed Roth conversion opportunities and the Voluntary Contributions plan on "For Your Benefit" at Federal News Radio. You can listen to an archived version of the show and download an extensive handout accompanying the program.

Federal News Radio columnist and radio personality Mike Causey also gave me the opportunity to discuss this subject on his show earlier this week. You also can listen to the archived version of that show.

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.