Your Own Retirement Savings Plan

According to a Thrift Savings Plan report released in May, 146,000 Civil Service Retirement System employees currently contribute to a Thrift Savings Plan account. By comparison, more than 2 million employees covered under the Federal Employees Retirement System are putting money into the TSP, along with 312,000 FERS employees who only receive automatic contributions from their agencies.

The difference, of course, is that TSP contributions are a more important part of the retirement package for those under FERS -- and there are simply more employees covered under FERS these days as CSRS gradually goes away. Still, while I’m sure there are some CSRS employees who do not contribute to a TSP account, most I talk to do, to get the benefits of tax-deferred savings as they establish a nest egg for their future.

There’s another option for CSRS employees who want to invest in their own retirement, however. It’s called Voluntary Contributions. I last wrote about this program in a 2010 column. I figured it’s time for an update.

What It Is

Voluntary Contributions is a savings program open to current employees (and recently retired employees who are waiting for the final processing of their retirement request) covered by CSRS and CSRS Offset. Employees can contribute up to 10 percent of their lifetime federal salaries to this account during their careers. These contributions can be made on a regular basis, sporadically, or all at once. Contributions must be made in multiples of $25.

Putting money into Voluntary Contributions is very similar to making a deposit to a bank account. The money is safe (it is protected by the full faith and credit of the federal government) and earns interest. The 2013 interest rate is 1.625 percent -- the same as in the Civil Service Trust Fund. The interest credited to voluntary contributions accounts is compounded annually on Dec. 31. While you're contributing after-tax dollars, the interest grows tax-deferred and your investment is safe.

Getting Started

To set up a Voluntary Contributions account, you will need an SF 2804 form. You can fill it out online, but the form itself must be printed on paper and submitted to a retirement specialist in your human resources office. The specialist will complete the agency certification section and submit the form to the Office of Personnel Management for you.

If you’re planning to retire within the next three to four months, you can include the completed SF 2804 with your retirement application package. If you’ve already have left federal service and are waiting for your retirement to be approved, then you can send your application directly to OPM's Retirement Operations Center at P.O. Box 45, Boyers, Pa., 16017-0045. No agency certification is necessary at this point. If your retirement claim already has been finalized, then you are not eligible to make Voluntary Contributions deposits.

One caveat: If you owe money to the retirement fund for nondeduction service (service that was not subject to civil service retirement withholding, such as temporary service), or refunded civil service retirement contributions, you won't be permitted to participate in Voluntary Contributions unless you pay your deposit, or redeposit the refunded contributions.

Withdrawal Options

You are permitted only one withdrawal from Voluntary Contributions, and it must be for the full amount of the account. You can make this withdrawal while you are still employed, or choose to do so when you file for retirement benefits. The withdrawal is made using form RI 38-124. Be sure you use the most recent version of the form, issued in July 2010.

The withdrawal options are:

• A lump-sum refund either at retirement, or as soon as possible. Remember, once you make a withdrawal you will no longer be able to contribute unless you have a break in service and are rehired.
• A rollover. The interest portion can be paid to you with 20 percent income tax withholding, or it can be paid directly to an individual retirement arrangement. If the money is going to a Roth IRA, you can choose to have taxes withheld from the interest portion. The interest portion also can be transferred directly to the TSP (which requires form TSP 60). The contributions portion can be paid in a lump sum to you, or sent directly to your IRA. You can’t have some of the funds paid to you and some to your IRA.
• An additional CSRS annuity. If you select this option, then the additional annuity will not include any cost-of-living adjustments. Upon your death, any balance that was not paid to you will be paid in a lump sum to the beneficiary of your CSRS contributions as indicated in your CSRS Beneficiary Designation form SF 2808, or according to the standard federal order of precedence if no valid beneficiary form has been filed. If you retire at age 55 or younger and do not choose a survivor annuity benefit, then for every $100 in Voluntary Contributions, you will receive an additional $7 per year in retirement benefits. The annuity is payable for the rest of your life. It increases by 20 cents for every year you are older than 55 at retirement.

Why Is This So Cool?

Here are a few reasons:

• The interest rate (1.625 percent) is higher than any bank I know of is paying right now. (When did we get to the point that an interest rate below 2 percent is considered great?)
• The 10 percent of lifetime salary that can be contributed could add up to more than six figures for some feds. Compare that to an IRA: If you're younger than 50, then your 2013 contributions to a traditional IRA or a Roth IRA are limited to $5,000, or the total of your taxable compensation, whichever is smaller. If you're 50 or older before the end of the year, then you're allowed to contribute up to an additional $1,000.
• There are no income limits for participating in Voluntary Contributions. The amount you can contribute to a Roth IRA, on the other hand, depends on your income. To make the full contribution, your modified adjusted gross income must be less than $112,000 if you're single, or $178,000 as a married couple filing jointly. If you earn slightly above those amounts, you might be able to make smaller contributions, which phase out after $127,000 and $188,000, respectively.
• You can transfer your entire Voluntary Contributions account to an IRA and you are not subject to the $5,000 limit, or by your income.

OPM offers a fact sheet on Voluntary Contributions, and provides more detailed guidance in Chapter 31 of the CSRS and FERS Handbook.

For More Information

Earlier this week, my colleague Bob Leins and I discussed Roth conversion opportunities and the Voluntary Contributions program on "For Your Benefit" at Federal News Radio. You can listen to an archived version of the show and download an extensive handout accompanying the program.

You also might want to check out a publication on Voluntary Contributions entitled “The Best Kept Secret in CSRS,” written by Micah Shilanski, a certified financial planner I’ve had the pleasure of meeting while teaching in Anchorage, Alaska.