Before You Take the CSRS VCP Annuity…

Federal employees in CSRS have a phenomenal benefit called the CSRS Voluntary Contributions Program (CSRS VCP). This benefit allows CSRS (and CSRS Offset) to contribute 10% of the base pay they’ve received over the years into a special after-tax account.

Your contributions do earn a small amount of interest – and the interest is tax-deferred.

The VCP was designed to allow CSRS to contribute extra money into a special account that would buy an annuity to supplement your CSRS pension.

But once your money is in the VCP – you actually have two choices

  • Choice #1) Leave the money in the VCP account until retirement – when your money is traded in for a VCP annuity (which we’ll be discussing here)
  • Choice #2) Transfer the money out of your VCP account (most commonly to a Roth IRA)

We’ve talked a lot about the benefits of transferring your money to a Roth IRA. The biggest benefit being that the VCP becomes a way to max-fund a Roth IRA even for people who make ‘too much money’ to contribute to a Roth.

But let’s take a look at the other option – buying the CSRS VCP annuity.

Increasing Your Pension?

Sometimes pamphlets present the VCP as a way to ‘increase your CSRS pension’. BUT – you need to know that even if you bought the VCP annuity – it is separate from your CSRS pension and has different rules than your CSRS pension.

How Much Income Will You Receive?

If you want to buy the CSRS VCP annuity – the amount of monthly income you’ll receive is based on how much money you had in your VCP account – and what age you retire and start the annuity.

The more money you have in your VCP account at retirement, and the older you are when you retire – the more money you’ll receive each month from the VCP annuity.

At age 55, every $100 you have in your VCP account at retirement will provide $7/year. So for a quick example – if you retire at age 55 with $100,000 in your VCP account – you’ll receive $7,000 a year ($583/month).

At face value, many people look at the ‘payouts’ of the VCP annuity and it doesn’t look that bad. But the real problems with taking the VCP annuity are in the details of how it works.

Here are the biggest problems I have with the CSRS VCP annuity.

Problem #1) No COLA Increases – Ever.

There is no cost of living increase at all on the CSRS VCP annuity.

So continuing our example of $7,000 a year – you’ll be receiving $7,000 a year for as long as you live – it will never increase. That is a huge disadvantage.

So when the VCP annuity is billed as a way to ‘increase your CSRS pension’ – it’s not entirely accurate. While your regular CSRS Pension will likely be increased by COLA over the years; you need to know that your VCP annuity will not be increased by COLA – ever.

Problem #2) Survivor Options on VCP are Very Different (in a Bad Way)

There is an option for a survivor benefit on the VCP annuity – but it is very different from the survivor benefits of your CSRS pension.

If you want a survivor benefit on your VCP annuity – you must name them on your paperwork at retirement. Then – there is a 30 day window where you can make changes to your survivor on the VCP annuity.

But after that 30 day window – no matter what – you can not make changes.

And I mean – no matter what.

What if your survivor passes away before you? You can *not* even name a new survivor. But you will continue to have the cost of the survivor benefit taken out of your annuity each month.

Here’s the ‘Note’ at the bottom of Section 31A3.1-1 ‘Purchase of Additional Annuity’ in OPM’s CSRS/FERS Handbook:

“If the employee elects to provide additional survivor annuity, the reduction of the additional annuity rate is permanent. The reduction will not be eliminated if the designated survivor predeceases the retiree, nor can the additional survivor annuity be transferred to a different person”

 This is incredibly restrictive.

Here’s a link to Chapter 31 on the VCP if you’d like to see for yourself…

Problem #3) Income Starts Right Way – No Deferral Growth

If you take the CSRS VCP annuity – your annuity begins at retirement. This means you don’t have the choice to defer taking income and let the money grow.

This ability to defer some retirement income is a very important factor in creating a retirement plan that will help you outpace inflation.

But with the CSRS VCP annuity, your income starts right away at retirement, and you don’t have that option.

The VCP Annuity Mixes After-Tax and Tax-Deferred Monies

When you take the VCP annuity, *all* of your VCP money is turned in to buy the VCP annuity. While your contributions to the VCP are after-tax, the interest you earn on your contributions is tax-deferred.

But when you transfer your VCP, you have the option to send your after-tax contributions and tax-deferred interest to different places.

This means you can keep the money separate.

So when you transfer your contributions to a Roth IRA – all of your money stays after-tax. And you can send your tax-deferred interest to another tax-deferred account like a Traditional IRA or even into the traditional portion of your TSP.

Keeping your money separate like this gives you better advantages for tax planning.

But when you do the VCP annuity, you have to turn in the entire balance of your VCP account – after-tax contributions *and* tax-deferred interest. That means that the money you receive as income from the VCP annuity is partially after-tax and partially tax-deferred.

For most people, the part that is taxable is much smaller than the after-tax portion. But this complication can make tax planning in retirement more difficult.

VCP Annuity Misses Out on the Real Power of the VCP

While it’s always worthwhile to understand your options – if you take the VCP annuity – you’re missing out on the real power of the VCP…

*The real power of the VCP is that it allows you an alternative way to max-fund a Roth IRA.*

Once your money is in a Roth IRA, you have a lot of choices in how you invest it. Depending on where your Roth IRA is held, you may have a wide range of investment options indeed.

The kicker for most people is that it is difficult to take advantage of a Roth IRA. The annual contribution limits are pretty small, and depending on your income, you may not be able to make annual contributions to a Roth IRA at all.

However something interesting happened in 2010, and the limits on who could *convert* money into a Roth IRA were removed. This means that you might make ‘too much money’ to *contribute* money directly to a Roth IRA, but that you could still be eligible to *convert* money from other qualified accounts into a Roth IRA.

So what’s the catch?

Well first, you have to pay taxes on the amount converted now.

But second, the money you convert into a Roth IRA can only come from other ‘qualified accounts’ (think Traditional IRA, TSP, 401(k), etc.). And most of those qualified accounts also have their own limits on how much money you can put in.

So even though you can convert money from those accounts into a Roth – you can only *convert* as much money as you already have in those accounts.

Now, enter the CSRS VCP. It is also considered a qualified account – but the contribution ‘limit’ is really very high (especially compared to other qualified accounts).

Everyone’s limit will be different – but it’s not uncommon for CSRS to have a VCP contribution ‘limit’ over $100,000.

And it has a unique benefit in that your ‘contribution limit’ is cumulative, and not annual. So for CSRS who have their financial ducks in a row approaching retirement, the VCP is a tremendous opportunity to get quite a bit of money into a Roth IRA. That’s the real power in the VCP.

Once your money is in a Roth IRA – you still have a wide range of investment choices. But when you make those investments in your Roth IRA, you can get the advantages of the Roth on those investments.

Important: VCP Annuity is the ‘Default’ Choice

But even though most people decide to transfer their VCP to a Roth IRA – it’s important to know that OPM still considers buying the VCP annuity as the ‘default’ choice.

So if you intend to transfer your money to a Roth IRA – but don’t file the proper forms by retirement, OPM will sign you up for the VCP annuity anyway because that is the default action.

Looking for More Info on CSRS Voluntary Contributions?

There’s lots more to know about the CSRS VCP program. Over the years I’ve gotten so many questions about the VCP that I’ve taken my experience helping clients with the VCP and compiled it into the most comprehensive book available on the topic:  The Best Kept Secret in CSRS.

© 2016 Micah Shilanski, CFP®. All rights reserved. This article may not be reproduced without express written consent from Micah Shilanski, CFP®.

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About the Author

Micah Shilanski is a Certified Financial Planner™ professional who specializes in helping federal employees get the most out of their retirement benefits. Micah helps his clients with tax planning, retirement planning, federal retirement planning, estate planning, and investment advice.

Plan Your Federal Retirement is a dba of Shilanski & Associates, Inc., an Alaska Registered Investment Advisor, with securities offered through Summit Brokerage Services, Inc., Member FINRA/SIPC.

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  1. inds_flames says:

    I am 66 years old and plan to retire in 2014 at which time I would transfer (convert) my Voluntary Contribution Program monies directly into a newly created Roth IRA. However, I have an existing (non-TSP) Traditional IRA (never taxed) and know that IRS will aggregate my Traditional IRA balance for purposes of determining the taxability of this VCP to Roth conversion.

    If, prior to retirement,
    I transfer (direct rollover) my Traditional IRA into my exisiting TSP account will those monies now be considered 401(a) monies ?; and thus making my subsequent VC to Roth conversion occur  with very minute tax implications ?

  2. Inds_flames says:

    I am 66 years old and
    plan to retire in 2014 at which time I would transfer (convert) my Voluntary
    Contribution Program monies directly into a newly created Roth IRA. However, I
    have an existing (non-TSP) Traditional IRA (never taxed) and know that IRS will
    aggregate my Traditional IRA balance for purposes of determining the taxability
    of this VCP to Roth conversion.

    If, prior to retirement,
    I transfer (direct rollover) my Traditional IRA into my exisiting TSP account
    will those monies now be considered 401(a) monies ?; and thus making my
    subsequent VC to Roth conversion occur  with
    very minute tax implications.

  3. Tom Lawrence says:

    This is a GREAT way to beef up your ROTH IRA.  In the months prior to retirement, have all of your ducks in a row, contribute a lump sum in the largest amount you can. Then, the next pay period transfer it to your ROTH. You do not have to wait until the day you walk out the door. In fact DON’T. You do not want to risk a screw up by the government and end up with the annuity.

  4. William H. Russell says:

    When was the Voluntary Contributions plan authorized by congress, and when did OPM make it available to government workers?
    I believe congress authorized the VCP in 1932, but it was not made available to government workers by OPM until around 1989.  Who can tell us why OPM waited so long, and which government worker, with the help of the Washington Post, forced OPM to activate the VCP after all those years?  I know the answers, but I may be the only one who does know.

  5. Rollover says:

    What has been the interest rates over the last several years earned on the VCP account

  6. Lessa615 says:

    1.  Can you transfer the VCP to the Roth portion of your TSP or does it have to be a Roth account outside of the TSP? 

    2.  Does it make sense to continue to contribute to VCP if you are unable to currently make the max contributions to TSP?

    • Fred Gov says:

       1) Voluntary Contributions CANNOT be transferred to TSP

      2) It depends on your situation. TSP contributions are pre-tax and lower your current tax bill, but you will pay at your top marginal rate when you withdraw them. The contributions to VCP are after tax and if transferred to a Roth IRA can be withdrawn free from tax. The Roth IRA is also not subject to the minimum required distribution requirement.

  7. John Grobe says:

    CSRS and CSRS Offset employees who owe a civilian deposit or re-deposit are not allowed to contribute to the VCP.

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