CSRS Voluntary Contribution Program – The Additional Annuity Option
A Big Benefit With a Cinderella Story
While the CSRS Voluntary Contribution Program (VCP) can be a great benefit for CSRS employees, it is often given far less attention than the CSRS retirement annuity and the FEHB plan. However, the VCP offers great options like the opportunity to supercharge a Roth IRA account or have a second annuity after retirement, and should be seriously considered as a part of retirement planning for all CSRS employees.
Supercharging Your Roth IRA
You can contribute up to 10% (after taxes) of your entire federal service earnings to the VCP. Over a 30-year career that could equal hundreds of thousands of dollars in savings.
You can earn tax-deferred interest on the account, roll it over into a Roth IRA, or purchase an annuity. Can you imagine supercharging your Roth IRA by rolling over your entire VCP balance? And talk about the tax, retirement, and estate planning possibilities!
But while the IRA rollover option tends to become the elephant in the room and drown out the other possibilities, the benefits of the annuity option shouldn’t be ignored.
A Second Annuity
CSRS employees have one of the few defined benefit programs still existing in America, and automatically receive a lifetime pension based on service history and “high-3” salary. But many employees under the CSRS and CSRS offset systems are unaware of the option they have to purchase a second annuity through the VCP.
VCP Annuity: How it Works
For every $100 you have in the VCP when you retire (including interest earned), you will receive $7 per year for life, plus another $0.20 for each full year you are over age 55 at the time you retire. So, if you retire at age 60, your annuity per $100 in the VCP would be $7 plus $1 (5 years x $0.20) = $8.
Survivor Selection – The Limits
You can select anyone you want as the survivor beneficiary on your annuity, but depending on the age difference between you and your selected survivor, your annuity will be reduced anywhere from 10% to 40%.
You only have 30 days to revise your survivor selection. After that, you are stuck with the decision.
If your survivor predeceases you, your annuity reduction won’t be lifted, and you won’t receive a survivor annuity payout. Your estate or survivor(s) under the order of precedence will receive the remaining balance of contributions and any earned interest that was not already paid out.
The annuity has no COLAs. If you are receiving a $5,000 VCP annuity in your first year of retirement, you will receive the same amount 20 years later.
The Default Choice
The annuity with a survivor benefit is the default choice for the VCP, so if you would rather use it as a principal protected savings account, a vehicle to fund a Roth IRA, or just an annuity without a survivor benefit, you must elect these changes when you first begin making contributions.
With all of the benefits and limitations in mind, you should consider whether the annuity option is the best way for you to take advantage of the CSRS Voluntary Contribution Program. To consider all your options, speak with a federal benefits consultant.