Federal Voluntary Contributions Program

Submitted by Paul Dion on Fri, 2012-08-10 21:02

To: Joe Cicchinelli, regarding Canon’s question in the August 9th Slott report. Canon’s question may not have been directed to you correctly. The Federal government offers this voluntary contribution program that allows a Civil Service employee who is in the old, pre-1983, pension plan, the opportunity to increase their pension through this porgram. At retirement they can elect an immediate annunity, a full didtribution with the earnings taxable in that year, or they can roll over the earnings into an IRA. It is an annunity program, no different from any other annunity that allows an accumulation of earnings, but with the twist of allowing the conversion of earnings to an IRA at retirement. Converting the full amount to a Roth would not be allowable since it is an annunity and the owner could, if they wanted to, contribute up to their lifetime earnings into the account.



Submitted by Barbara Ohlinger on Tue, 2012-08-14 17:33

A ROTH IRA IS allowable. Why are you saying it is not allowable?



Submitted by Alan Spross on Tue, 2012-08-14 18:02

The VCP balance might have almost no earnings if established recently or a considerable amount of earnings may have built up. If the earnings are very small, it is easier to roll the entire balance to a Roth IRA in a qualified Roth rollover. The earnings will be taxable, but if small enough this should not present a problem.

However, if the earnings are large enough so that you do not want the additional tax bill, you can roll the earnings to the TSP and just the basis to the Roth in a tax free Roth rollover.

Of course, you can also use the full amount for your annuity or take a full distribution in which the earnings will be taxable (possibly subject to penalty as well).

You generally cannot mix and match amounts between the annuity, rollovers, or the taxable distribution.



Submitted by Bruce Steiner on Tue, 2012-08-14 19:23

Suppose someone has had a long career with the Federal government and has earned, say, $2 million of salary over the course of her career. Does this mean that, just before retiring, she can make a voluntary contribution of $200,000, and then upon retirement roll over the $200,000 (plus, say, the $10 of earnings on it in the interim) into a Roth IRA, and only pay tax on $10? If so, is this easy to accomplish?



Submitted by Alan Spross on Tue, 2012-08-14 19:52

Should be an easy decision if they have the cash to come up with the 10% max or any amount less than that to make the contribution. Here is the rollover Notice provided to participant:

http://www.opm.gov/retire/pubs/pamphlets/forms/RI37-22.pdf

Note that there is no mention of the “isolation of basis” issues suggested by IRS Notice 2009-68.

Since all or most of the Roth rollover will be after tax dollars, there is essentially no holding period to take Roth IRA distributions of that money in an emergency. The penalty only applies to the pre tax amount of the rollover and does not apply at all after 59.5.



Submitted by Barbara Ohlinger on Wed, 2012-08-15 16:58

No need to retire to convert after tax contributions from the voluntary contribution plan into a ROTH IRA. However as you stated earnings from the money put into the Voluntary Contribution Plan can not be converted into a ROTH IRA.



Submitted by Barbara Ohlinger on Wed, 2012-08-15 19:00

If you had $300,000 would you put it into a ROTH IRA or some other place such as stocks, real estate, gold, other hard assets?



Submitted by Bruce Steiner on Wed, 2012-08-15 19:07

In this case, she would put the money into a Roth IRA (via the voluntary contribution program), and then invest the money in the Roth IRA in whatever assets she thought best (within the very broad limitations of what you can invest an IRA in).

You can invest an IRA in stocks, real estate (in this case, to the extent she wanted to invest in real estate, she would do so through REITs or a REIT mutual fund rather than actual real estate), gold (certain gold coins are permitted, though in this case she probably wouldn’t invest in them).



Submitted by Alan Spross on Wed, 2012-08-15 19:22

[quote=”[email protected]“]No need to retire to convert after tax contributions from the voluntary contribution plan into a ROTH IRA. However as you stated earnings from the money put into the Voluntary Contribution Plan can not be converted into a ROTH IRA.[/quote]

I don’t think I stated that. Earnings on the after tax contributions CAN be rolled over to the Roth IRA along with the after tax contributions. However, the earnings amount will be taxable. If the earnings are small enough (eg when someone made the large contribution on prior earnings), and then did the rollover there would be little time to generate earnings. However, if the earnings amount is large enough so that rolling earnings to the Roth IRA presents a tax bill you don’t wish to pay, the earnings can be rolled to the TSP or TIRA account. The contributions would go to the Roth and the earnings would go to another plan to eliminate current taxation of the earnings. Of course, the earnings will be taxed eventually when distributed.



Submitted by Barbara Ohlinger on Thu, 2012-08-16 12:40

However, you can take advantage of this conversion without having to retire from the federal govt. Just fund your voluntary contribution plan (up to 10% of your gross income)then convert this to a ROTH IRA. All this while you are still employed with the federal govt.



Submitted by Alan Spross on Thu, 2012-08-16 17:18

Yes, that is true.

But once you take a distribution while still employed (includes Roth rollover), you can never again make additional voluntary contributions.



Submitted by Barbara Ohlinger on Mon, 2012-08-20 19:40

OK, So it is a one time deal. Could you please outline the steps I would have to complete along with the govt forms involved?
thank you



Submitted by Alan Spross on Mon, 2012-08-20 19:43

Steps from what starting point? Are you qualified to make a contribution based on your prior earnings, but have not yet done so?



Submitted by Barbara Ohlinger on Tue, 2012-08-21 19:20

I am qualified to make a contribution on 10% of my gross agregate earnings but have not done so yet. I have funds to do deposit 10% of my AGI into my Voluntary Contribution Plan. I think I know where to get that form to make the deposit. What do I do then in order to put it into a ROTH IRA?



Submitted by Alan Spross on Tue, 2012-08-21 23:39

It looks like the following form is used to request a distribution. You have a choice between a direct rollover or a distribution made out to you. A direct rollover avoids withholding on the pre tax portion (any earnings on your after tax contributions) and is faster.

http://www.opm.gov/forms/pdf_fill/ri38-124.pdf

Of course, if you do not currently have a Roth IRA, you must open one to receive the rollover before ordering a direct rollover. If you never made after tax contributions before, then there will not be any earnings to speak of. However, if you made some contributions in prior years, there could be some earnings buildup in your account. You should find out how much earnings you have in the account because earnings will be taxable if you roll the entire balance over to a Roth IRA.



Submitted by Barbara Ohlinger on Wed, 2012-08-22 12:20

I have made no contributions to a voluntary contribution plan. I have not even opened one. I have a printout of my aggregate gross income from the payroll office. What steps do I need to take to put this money into a selfdirected Rothe IRA?



Submitted by Barbara Ohlinger on Wed, 2012-08-22 12:28

I do not have a federal voluntary contribution program acct (never had one). I am a current federal employee. I got a printout of my aggregate gross income from payroll office. I want to put the maximum possible eligible to me into a federal voluntary contribution program. I want to convert(or what ever the proper name is ) this money in my voluntary contribution plan into a ROTH IRA. Can you outline what steps to take?



Submitted by Alan Spross on Wed, 2012-08-22 21:40

You need this form (see Instructions attached) to open a Voluntary contributions account. You can make a lump sum contribution up to the limit you were authorized and/or you can add to it by making payroll deductions. The form says not to make your contribution until the account has been opened. There is also a toll free phone # for additional questions. Once you decide to roll your contribution over to a Roth IRA, you cannot contribute any more after the rollover. Since it appears that you want to make a lump sum contribution and then immediately roll that to the Roth IRA, there should be almost no taxable earnings included in the Roth rollover.

http://www.opm.gov/forms/pdf_fill/sf2804.pdf

I addressed the Roth rollover part in an earlier post, but first you need to open the account, then make the contribution after they authorize it.



Submitted by Barbara Ohlinger on Fri, 2012-08-24 17:09

Thank you, After I get the money in the Voluntary Contribution Plan, do I need to open a ROTH IRA first (in order to have an acct # to have them transfer the money to). I do not know if $$ has to be put directly into the ROTH IRA from the voluntary contribution plan or a check can be sent to my address and I put it into the ROTH IRA after I recieve it? Can you open a ROTH IRA acct before you recieve the money (in order to have an acct # to tell the Voluntary Contribution Plan to send it to).



Submitted by Alan Spross on Fri, 2012-08-24 17:34

Yes, you can open the Roth IRA in most places and explain that it will be used to fund a roth rollover from an employer plan. Determine how you plan to invest the money when choosing a custodian. Larger firms like Fidelity, Vanguard and Schwab can provide free assistance in completing the rollover. You can either do a direct rollover or have the check made out to you and roll it over yourself, but 60 days after receipt is the deadline to complete the rollover.

Many employer plans will make the check out to your Roth IRA FBO (For benefit of) your name, but send it to you to deliver to the Roth custodian.



Submitted by Barbara Ohlinger on Tue, 2012-09-04 13:48

Can I convert the money oin my Voluntary Contribution Plan directly into my Thrift Savings Plan (TSP) and into a ROTH TSP account? thanks for your help



Submitted by Alan Spross on Tue, 2012-09-04 17:16

TSP brochures posted on their website do NOT allow in plan rollovers from the pre tax TSP account to the Roth account. In addition, the voluntary contributions plan is a different plan than the TSP, so even if the TSP allows in plan rollovers (essentially a conversion) in the future, this feature would probably not include Voluntary Contribution plan funds.

If you had earnings in your voluntary fund, you could transfer the earnings to the pre tax TSP account while the after tax contributions themselves could be converted to a Roth IRA. Since you will have almost no earnings since you have not contributed in the past, you would make your contribution and then convert right away unless you want to make additional contributions. Once you convert, you cannot make more additional contributions.

Even if you could convert to the Roth TSP, you would have to take RMDs at age 70.5 unless you were still working then. A Roth IRA does NOT have RMDs for Roth IRA owners, so you would likely transfer any Roth TSP funds to a Roth IRA before reaching 70.5 anyway to avoid RMDs. In addition, if you transferred a Roth TSP before you completed 5 years to a Roth IRA, you would have to start over with a new 5 year holding period. But if you convert to a Roth IRA to begin with, you will only have to meet one 5 year holding period for your earnings to be tax free.

So it looks like the only option is the Roth IRA for your conversion of voluntary plan contributions.



Submitted by Barbara Ohlinger on Thu, 2012-09-06 14:26

thank you, I was interested in putting it into a TSP ROTH because of the TSP [u]very low fees and low management costs[/u]. It is an excellent low cost place to invest $$. Are you sure there are required withdrawls with the ROTH TSP? That just does not sound right to have a requirement to withdraw on a ROTH investment.



Submitted by Alan Spross on Thu, 2012-09-06 16:40

Yes, this is one of the differences between a designated Roth and a Roth IRA. Another difference is that if you take distributions from the Roth TSP before it is qualified, a pro rated amount of earnings is included. For a Roth IRA, earnings always come out last.

Most people eliminate the problem of Roth TSP or 401k RMDs by rolling the plan over to a Roth IRA at retirement to eliminate RMDs. However, that would not eliminate the RMD for the year of the rollover if taxpayer reaches 70.5.

With a low cost mutual fund provider, you can come pretty close to the low TSP expense ratios. Vanguard is one example of such a provider.



Submitted by Barbara Ohlinger on Fri, 2012-09-07 14:26

When you figure your aggregate gross income(AGI) , is it figured from base salary or from your gross pay before deductions? Gross pay would be much higher than base pay. So for the amt allowable to deposit into the Voluntary Contribution Plan, is it 10% of a person’s base pay or 10% of a person’s total gross pay before deductions?



Submitted by Alan Spross on Fri, 2012-09-07 16:15

They will use your base pay before deductions. Overtime, bonuses, or other additional pay will not be included. When you file Form 2804 to open your account, attach a request for them to provide you with your total base pay eligible for the 10% contribution.



Submitted by Barbara Ohlinger on Tue, 2012-09-11 20:20

Is there any threat of this voluntary contribution plan and the ability to convert the monies in the plan into a ROTH IRA being taken away or no longer being available to Federal workers?



Submitted by Alan Spross on Tue, 2012-09-11 21:35

There is no current proposal that would restrict these rollovers, and I don’t see any reason to think there would be.

However, there are no guarantees with Congress. Some legislators are pushing for simplification of all the retirement plan types and options so that might constitute a possible risk to this strategy at some point. Note that many 401k plans also accept annual after tax contributions in addition to the pre tax deferrals. In many of those plans, these after tax contributions can be converted to a Roth IRA with no limit on the number of conversions done. While the rules are somewhat different since that is a year by year option and they cannot go back to prior year earnings and contribute like the VCP plan, it is largely similar.



Submitted by Barbara Ohlinger on Wed, 2012-09-12 14:26

With the limited and decreasing number of CSRS employees who are still employed by the federal govt it would make no sense for anyone to spend time against this allowable conversion. The 10% AGI limit and the ROTH IRA 5 year rule are the restrictions. Does anyone know the current rate of return the Voluntary Contribution Plan offers if you just left the $$ in the plan?



Submitted by Barbara Ohlinger on Thu, 2012-09-13 14:23

If you fund the Voluntary Contribution Plan and leave $$ there and don’t convert it into a ROTH IRA you receive an interest rate return correct. I am asking what the rate of interest is or what the rate is tied to.



Submitted by Barbara Ohlinger on Mon, 2012-09-24 17:34

what is the return on the Federal Contribution Plan and what is the interest rate return tied to?



Submitted by Barbara Ohlinger on Thu, 2012-10-04 14:45

Does anyone know the current rate of return for the Federal Voluntary Contribution Program and what the rate is tied to?



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