A Unique Roth Opportunity Utilizing the Voluntary Contribution Program
Brandon S. Christy, CPA, PFS
There is but one group of people in the United States that has the opportunity
to create a large Roth account at will, with no negative tax implications. Only
the CSRS employee, via the seldom-used Voluntary Contribution Program (VCP) can
instantly produce such an account.
Not many Federal employees take advantage of the VCP, but regardless of
income, CSRS employees have an amazing chance to use the VCP in a process that
will create a Roth retirement account with completely tax free earnings. This
incredible possibility stems from the Pension Protection Act of 2006 and
subsequent amendments that allow for unique distribution options of the VCP.
The benefits of a Roth IRA have mainly to do with taxation. Post-tax money
invested in a Roth grows tax-free, an enormous long-term benefit which sets the
Roth apart from traditional IRAs. Also, unlike traditional IRAs, Roth IRAs do
not have required minimum distributions (which begin at age 70.5), making them
perfect vehicles for estate planning.
The Voluntary Contributions Program was created to supplement an employee's
retirement annuity. The money grows at a steady, but modest, interest rate
(2.75% in 2011) and enhances the employee's pension after retirement (either by
a lump sum withdrawal or by conversion into an annuity at retirement).
The Pension Protection Act of 2006 with amendments allows for section 401(a)
plans (which include the VCP) to be transferred directly into a Roth IRA.
Unlike the average investor who has to use an existing IRA or 401(k) that may
have no basis, federal employees can use the VCP as a vehicle for quickly
creating a substantial Roth IRA with very minute tax implications. To accomplish
this task, you can make some simple OPM accepted form modifications. This
is an absolutely amazing advantage that may or may not continue in future years. Ten percent of a person's lifetime "basic pay" (wages that are susceptible to
retirement contributions) can be deposited into the VCP and then
rollover-converted into a Roth IRA. Assume lifetime earnings of at least
$1,000,000:
Your Roth can then grow tax free for as long as you like. Because the money
deposited into the VCP was after-tax money, the basis in the conversion will not
be taxed. This situation is unique to CSRS federal employees, as only they
have the ability to open a VCP account.
This great opportunity does come with its own degree of difficulty. The
process outlined above, though simple in theory, is actually quite complicated
and even the smallest mistake may have enormous financial consequences. For
example, earnings on the funds while in the VCP will be taxable at transfer,
unless rolled into the TSP. Also, there can be no outstanding deposits or
re-deposits prior to funding a VCP. For these reasons (among others), it
is advisable that the employee seeks the counsel of a financial planner familiar
with the nuances of federal benefits and tax law before attempting this.
Revised: 7/15/2011
About the Author
Brandon S. Christy, CPA, PFS, is the President of
Christy Capital Management (CCM) and founder of the Retirement Benefits
Institute (RBI).
RBI has provided benefits and
retirement training sessions to thousands of federal employees. A schedule of
upcoming training sessions (which are provided at no-cost for federal employees)
can be found at: http://www.retireinstitute.com/training.php.
CCM offers retirement analyses for federal
employees, building in financial and tax planning concepts for a comprehensive
view of retirement. For a no-cost consultation or other planning needs, contact
CCM toll-free at 866-331-7749 or visit http://www.christycapital.com
Disclaimer
The information contained in this
article should not be used in any actual transaction without the advice and
guidance of a tax or financial professional who is familiar with all the
relevant facts. The information contained here is general in nature and is not
intended as legal, tax or investment advice. Furthermore, the information
contained herein may not be applicable to or suitable for the individuals'
specific circumstances or needs and may require consideration of other
matters.
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