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Longtime Federal Workers Have a Secret Weapon for Retirement

For your eligible clients, this powerful retirement-planning strategy shouldn't be missed.

Helen Modly, CFP, ChFC, 01/09/2014

Federal employees in the Civil Service Retirement System (CSRS) prior to 1987 who did not switch to the Federal Employee Retirement System (FERS) have access to a powerful retirement wealth accumulation strategy, the Voluntary Contribution Plan (VCP). Although not widely known or understood, the VCP allows them to contribute aftertax dollars and then distribute those contributions directly into a Roth IRA, regardless of their income level.

At the risk of sounding too good to be true, this is a valid strategy for those long-term CSRS employees who have not yet retired. Under the CSRS and the CSRS offset systems, there is an additional retirement plan called the Voluntary Contribution Plan. This plan allows CSRS folks the ability to contribute up to 10% of their cumulative CSRS base pay throughout their service on an aftertax basis into the plan. All contributions to the VCP earn a rate of interest (currently 1.65%), which is tax-deferred.

The contribution can be made on a regular basis over the years or by a lump-sum deposit at any time during their careers, even in the year of retirement. The original purpose for the VCP was to allow employees to save for the purchase of an additional retirement annuity, which, by the way, is still the default distribution option for the VCP. However, there is also the ability to withdraw these aftertax contributions BEFORE retirement and roll them directly into a Roth IRA.

Consider the implications for someone who earned an average of $75,000 over a 30-year civil service career. Their cumulative base pay would be around $2,000,000 allowing them to contribute up to $200,000 into the VCP (10% of cumulative base pay). If they didn't make these contributions over the years, they could write a check into the plan as late as the year of retirement. At retirement, they can roll over the tax-deferred interest into a traditional IRA or their TSP plan, and roll over the aftertax contribution directly to a Roth IRA.

Who Qualifies for a VCP?
As explained in the retirement services handbook from the office of personnel management (OPM), only CSRS and CSRS offset employees may contribute to the VCP. There are a couple of restrictions, such as applicants must not owe a deposit for nondeduction civilian service or a redeposit for refunded retirement deductions. He or she will be eligible to make voluntary contributions only upon completing the deposit or redeposit.  An applicant who has previously received a refund of VCP contributions may not contribute unless re-employed in the CSRS. Employees under the FERS system are NOT eligible. See OPM's retirement services publication, chapter 31.

Those who do qualify can use form SF 2804 to open their account. The form is submitted to their agency HR department, which will certify it and forward to OPM for processing. Once their account is open, they may make regular, irregular, or a one-time contribution in $25 increments up to a maximum of 10% of their cumulative base pay at the time of the contribution. OPM will normally send a letter defining the maximum contribution amount allowed.

How to Get a Refund Into a Roth IRA
At any time prior to the processing of their retirement paperwork, VCP participants can request a refund of their aftertax contributions and a rollover of their tax-deferred interest earnings.

NOTE: It is very important to begin the processing of these transactions BEFORE the actual retirement date. The default for the VCP plan is to purchase an additional annuity with these funds. If the application for refund has not been received and processed by OPM prior to the retirement date, an irrevocable decision to purchase the annuity will be assumed.

Helen Modly, CFP, ChFC, is executive vice president and director of investment services for Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 20 years of experience providing wealth-management services. She is a member of NAPFA and FPA. She can be reached at info@focus-wealth.com. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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