A 1939 law allows federal employees to increase their annuities and earn tax-deferred interest by voluntarily contributing to the Civil Service Retirement and Disability Fund. But few Civil Service Retirement System employees have signed up for the Voluntary Contributions Program, in large part because few personnel offices and even fewer employees know the program exists. In this column, I’ll fill in the blanks.
Who can participate? CSRS and CSRS Offset employees who don’t owe any deposits or redeposits to the retirement fund may invest up to 10 percent of lifetime federal civilian earnings and earn market rate interest on deposits. Those deposits can be made at any time and in any amount, as long as they are in multiples of $25.
Federal Employees Retirement System employees can’t participate in the VCP because the law setting up FERS didn’t include a provision allowing that.
How are lifetime earnings determined? Since lifetime earnings continue to increase while you are employed by the government, you are dealing with a moving target when it comes to making deposits. The Office of Personnel Management has a mechanism that can protect you from overcontributing. When your VCP account reaches $50,000, OPM will send you a letter asking you to provide your salary history. You can estimate that by looking at your Standard Form 50s, which report every change in salary. If your history shows you have contributed more than the 10 percent limit, OPM will stop accepting deposits until your earnings increase sufficiently to bring you under the limit.
If you make contributions that exceed the limit, the excess will be refunded to you, without interest, when you close your VCP account. You can do that at any time and for any reason. However, once you close your account, it can only be reopened if you resign from the government and later return in a position covered by CSRS or CSRS Offset.
What are my VCP options? At retirement, you can use your account to buy additional annuity. If you are age 55, every $100 in your VCP account will buy you an additional $7 per year of annuity. You get 20 cents more than that for each full year you are over age 55. So, for example, if you were 60 at retirement, each $100 would buy $8 of annuity. That may not sound like much, but depending on how much you invested, how much you earned in interest and how long you live, it could be significant.
If you purchase additional annuity, you may also elect a survivor benefit. If you do, your own annuity will be reduced, just as it is when you elect a survivor annuity under CSRS or CSRS Offset. However, unlike those survivor annuity elections, you can name anyone to be your beneficiary. Your VCP survivor election doesn’t require spousal consent, nor is it subject to garnishment.
Although buying additional annuity appeals to some CSRS and CSRS Offset employees, many who invest in the VCP do so to earn tax-deferred interest. Their goal is to let the investment grow until needed or at retirement, whichever comes first. Be aware that when you retire, your VCP account no longer earns interest.
Is the VCP a good investment? One advantage of the VCP is that you can earn the same interest rate whether you invest small or large amounts. And you’ll know what the interest is before you put your money in because rates are set for the year ahead. In the past, the rate has been as high as 13 percent. However, for 2013, it is only 1.625 percent. While it’s not that good, it’s better than many banks are offering.
Obviously, there are plenty of places other than the VCP to put your investment dollars. Most financial advisers recommend that you maximize your contributions to the Thrift Saving Plan before considering other investments. However, one advantage of the VCP is that, like the TSP G Fund and U.S. Savings Bonds, your investment is backed by the government.
How can I participate? Submit Standard Form 2804, “Application to Make Voluntary Contributions,” to your agency. Once the form is approved, OPM will send you instructions for making contributions. SF 2804 is available at www.opm.gov, along with additional information in Publication RI 83-10.