Many CSRS employees are at a point in their careers where they are staring retirement in the face. Their plans for a comfortable retirement are being affected by decisions they made (or didn’t make) earlier in their careers. Among the biggest of those decisions was not starting early enough to save for retirement. Did you:
- Not even think about retirement until you were in your 40s?
- Delay saving for retirement because
- You bought a home?
- You put your children through college?
- Not take full advantage of tax-deferred savings opportunities such as the TSP and IRAs?
You are not alone if you recognize yourself in this description. The time many of us have lost in saving for retirement cannot be found again. In addition, some of the retirement savings instruments that today’s young employees take for granted (the TSP, for example) weren’t even introduced until we were half way through our careers.
Now that we are closer to retiring, we find ourselves playing catch-up in order to have enough money for a comfortable retirement. Among the first things we should do is to contribute to tax-deferred retirement accounts. First and foremost we should consider the Thrift Savings Plan.
This year we can contribute up to $15,500 of our earnings to the TSP on a before-tax basis. Beginning in the year we turn 50, we can contribute an additional $5,000 in "catch-up" contributions. In addition we can fund an IRA (the type of IRA you can fund depends upon your income). In 2007 you can contribute $4,000 to an IRA, $5,000 if you are 50 or older.
What if this is still not enough? If the following describes you, you are eligible to make an additional tax-deferred investment that earns 4.875% (2007 rate).
- Are you a CSRS employee?
- Do you have no outstanding deposits or re-deposits for civilian service? (Military deposits are irrelevant)
Employees who meet these two criteria can make voluntary contributions to the Civil Service Retirement Fund. Their post-tax contributions earn tax-deferred interest at a rate set by the government each year. The rate for 2007 is 4.875%. Contributions must be at least $25 and can be made in multiples of $25.
Part of this program is really beneficial for those of us who now have a lot of money to invest for retirement, more than we can stash away on a tax-deferred basis in the TSP and IRAs. Perhaps we have received an inheritance or a large lump sum. In the Voluntary Contributions Program (VCP) you can contribute up to 10% of the entire amount of salary you have received over your career as a federal employee.
You will have two choices of what to do with your investment when you retire. Paying taxes is not a choice – you will pay tax on the earnings you have received.
- You may purchase an additional annuity. At age 55, each $100 of contributions and earnings will buy you an annuity of $7 a year. The amount $100 will buy goes up $.20 for each year you are over 55. This annuity does not receive a cost of living increase. (See also, Should You Get a Survivor Annuity or Purchase Life Insurance?)
- You can take the money and run. Many retirees choose this option, using the funds for such purposes as helping to pay off their mortgage, buying a new car or boat, or taking the vacation they always dreamed of.
The VCP has been around for a long time, but has not received a lot of publicity. If you’re interested, contact your Human Resources Office for information on how to begin investing.