converting voluntary contribution plan to roth IRA
I am a federal employee for 30 years and currently working (not retired).
I would like to put 10% of my total salary that I have earned for 30 yrs ias a CSRS employee into the voluntary contribution plan and
convert the money into a Roth IRA with no penalty.
Is this possible?
Hopeful
Permalink Submitted by Alan Spross on Fri, 2011-11-11 02:09
Yes, it is possible. You must open a Voluntary contribution account and as I understand it, OPM will then advise you how much you are qualified to contribute based on the 10%. After you contribute to the account you can convert it to a Roth IRA basically tax free except for the small amount of earnings that may accrue on your contribution. Here is some additional info:
http://www.myfederalretirement.com/public/673.cfm
Permalink Submitted by Bruce Steiner on Fri, 2011-11-11 15:24
How much lead time do you need before you retire? The employee would likely want to put in the money just before retiring, and then upon retiring either roll it over to a Roth IRA or else purchase an annuity with it within the CSRS system.
Despite the usual disadvantages of annuities, namely cost, inflexibility, and income taxes, the payout on this if you use the voluntary contribution to purchase an annuity, the payout is substantially greater than what you would get from an insurance company.
Permalink Submitted by Alan Spross on Fri, 2011-11-11 18:32
The annuity may provide a good risk free return for life, but if you check into that option try to get an estimate of the taxable portion of each payment based on the assumed earnings and your life expectancy.
The Roth conversion option basically allows you to contribute a large amount of money to a Roth IRA which will result in tax free distributions. But if you annuitize the Roth, the gross annuity payout will not equal that of the retirement plan because individually purchased annuities have lower payouts due to expenses and adverse selection affecting the rates offered.
Of course, you may not even be interested in annuitizing your retirement assets, but if you are interested you should compare the two options on the net after tax expected distributions.
Permalink Submitted by Bruce Steiner on Fri, 2011-11-11 19:52
In the case I have in mind, there are sufficient other assets available, so it’s purely an investment decision. If she puts the money in and converts to a Roth, she would probably not take any distributions from the Roth during her lifetime, and then leave it to her children in separate trusts for their benefit. The opportunity to put a large amount of money into a Roth provides a substantial tax benefit. On the other hand, if she puts the money in and buys additional annuity, the annuity payout is 7%, plus 0.2% for each year over age 55 at retirement (reduced if she buys a survivor benefit). That’s much more than an insurance company would pay (at least as of now), though as Alan and I both pointed out, annuities have tax disadvantages (as well as inflexibility).
Permalink Submitted by Barbara Ohlinger on Tue, 2011-11-15 19:08
If I take 10% of my total Aggregate Base Income over 30 yrs and put this $ into my CSRS Voluntary Contribution plan then into a Roth IRA with [u][b]no penalty [/b][/u]and make a lot of money with this Roth IRA, when I die will the Roth IRA be included into Estate Tax limitation requirements?(now $5 million)
Permalink Submitted by Alan Spross on Tue, 2011-11-15 19:55
Yes. Your IRA and other retirement plan balances are included in your gross estate. And if you do not make the contribution, that money will also be in your estate.
To the extent that a Roth IRA saves you income taxes during your lifetime, you can expect to have a larger estate. A Roth IRA is also a more valuable asset to inherit than pre tax retirement plans or annuities.
Permalink Submitted by Barbara Ohlinger on Wed, 2011-11-16 20:31
Good point that a Roth IRA is potentially more valuable asset than some other taxable entity that may be benefited at my death. Is a Roth IRA valued or appraised more in an estate when figuring the value of an estate?
Permalink Submitted by Alan Spross on Wed, 2011-11-16 21:14
No, it is valued at it’s actual fair market value, same as a traditional IRA. Some estate planners recommend Roth conversions because the taxes due on the conversion reduces the size of the estate, and potentially saves estate tax. However, in your case there would be no tax for the conversion, and your estate would not be reduced.
Permalink Submitted by Barbara Ohlinger on Thu, 2011-11-17 17:22
Does anyone know if there is or will ever be a limit on the amt of Voluntary Contribution Plan (VCP)$$$ that can be converted into a Roth IRA. Also exactly what steps have to be done after the money is put into the VCP in order to have it into the Roth IRA with tax fre status?
Permalink Submitted by R C on Mon, 2012-01-16 16:22
[quote=”[email protected]“]Does anyone know if there is or will ever be a limit on the amt of Voluntary Contribution Plan (VCP)$$$ that can be converted into a Roth IRA. Also exactly what steps have to be done after the money is put into the VCP in order to have it into the Roth IRA with tax fre status?[/quote]
Limit is ten percent of your lifetime earnings. After the money is in the VCP you must give OPM instructions to transfer funds and close you account (you can only do this once). Make sure they send the contributions direct to the Roth holder and not you, and that the earnings go to the TSP or another IRA. Search Voluntary Contribution on the FederalSoup site for further.
RC