With apologies to readers in the Federal Employees Retirement System, this week's subject is of special interest to Civil Service Retirement System employees who are looking for a place to shelter money from income taxes. The subject is the Voluntary Contributions program, which I last wrote about three years ago.
A Voluntary Contributions account allows an employee who is under CSRS (or CSRS Offset) to invest after-tax dollars in the Civil Service Trust Fund above the required level of 7 percent of salary. Such investments earn tax-deferred interest at a variable rate determined by the Treasury Department each year (3.875 percent for 2009).
To be eligible to invest in this program you must:
- Have no outstanding civilian service credit deposits. (For more information, see Buying Retirement Credit, Feb. 10, 2006, and Redepositing CSRS Refunds, Feb. 17, 2006.)
- Be employed or have an application for CSRS retirement that is being finalized by the Office of Personnel Management.
- Have not received a refund of voluntary contributions during your current federal appointment.
But here's what's even better. The Voluntary Contributions program provides not only the ability to earn tax-deferred interest but the option of moving the money into an Individual Retirement Arrangement. Employees who are eligible for Voluntary Contributions can invest up to 10 percent of their lifetime salary in the program and then transfer the investment to an IRA.
So, by investing in voluntary contributions first and then transferring the funds to an IRA, a participant can place more than the annual limit in an IRA. For 2009, the annual limit is $5,000. (If you will be 50 or older by the end of the year, you can contribute an extra $1,000.) But there's no limit to how much money can be transferred from one retirement savings account to another.
For example, if you have earned $1,000,000 during your CSRS career, you could deposit as much as $100,000 into a Voluntary Contributions account and then immediately transfer these savings to an IRA. There, the money can grow tax-deferred until the required minimum distributions must start after age 70½.
On top of that, beginning in 2010, anyone will be able to transfer money from a traditional IRA to a Roth IRA, where the money can grow tax-free. Ordinarily, there's a $100,000 income limit on the ability to convert from a traditional IRA to a Roth. But for 2010, that limit disappears. (It's unclear whether it will be reinstated after 2010.) What's more, if any of the money in the traditional IRA is taxable (such as interest that has accumulated), tax payments for 2010 conversions can be spread out over two years.
This means that funds in Voluntary Contributions accounts (which were paid from after-tax dollars) can be transferred into a traditional IRA and then converted to a Roth. Some recently retired federal employees have set up this kind of account structure at the same time they submitted their CSRS retirement application.
Remember, though, that tax rates are scheduled to jump in 2011 and beyond. If you're thinking about taking advantage of this opportunity, it would be good idea to get the advice of a tax professional no later than Dec. 31, 2009.
Getting Started
Here's how to establish a Voluntary Contributions account:
- Submit form SF 2804 to your agency's retirement benefits office. Do not send money. If you are doing this close to your retirement, submit the form with your retirement application.
- OPM will send you a notification that it has established your account and is ready to accept your Voluntary Contribution deposit.
- Mail a personal check in the amount of your desired contribution (up to 10 percent of total career basic pay). Additional contributions may be made later in increments of $25 if you are still working. If you contribute at retirement, you will have only one opportunity to contribute.
- An employee may withdraw all voluntary contributions with interest at any time before retirement and before receiving additional annuity payments based on those contributions.
- To withdraw your voluntary contributions for the purpose of transferring them to an IRA or other type of investment, submit form RI 38-125. If you are contributing during the time your retirement application is being finalized with OPM, you should submit this form at the same time you send your contributions. Indicate on the form whether you want to transfer the entire account (or just the interest) to an IRA.
Remember, though, that if you do not file a request to take voluntary contributions out prior to OPM finalizing your retirement, the claims examiner will process those contributions as an additional annuity and add it to your CSRS retirement. There are no cost-of-living adjustments on this additional annuity, and it is computed at $7 per year for every $100 in your Voluntary Contributions account, with an additional 20 cents per year for every year you are over 55. Almost all withdrawals from Voluntary Contributions accounts are lump-sum payments -- very few people choose the annuity option.
It's possible that the retirement specialist in your human resources office may not be familiar with this program since very few employees have set up Voluntary Contributions accounts. If that's the case, give the specialist a copy of this column and refer them to Chapter 31 of the CSRS and FERS Handbook for further information.
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.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.