- The Washington Times - Monday, January 24, 2005

Are you a longtime fed with a large sum of money looking for a super-safe place to park it?

If a place where the money is guaranteed by the U.S. government that will pay you a guaranteed 4.375 percent this year has an appeal, you should check out the so-called voluntary contributions (VC) option.

The VC is the nearest thing there is to a government-backed certificate of deposit.

The VC is open only to working feds who are under the older Civil Service Retirement System or the CSRS Offset system. Several hundred thousand current employees, mostly people hired before the mid-1980s, are eligible for the VC option. Most don’t know about it, and many human resources offices are unfamiliar with the benefit.

It works like this:

Eligible workers set up an account through the Office of Personnel Management. They can invest after-tax money by writing a check in increments of $25 or more. They can invest as often as they like. The only limit is that the amount they put into the VC cannot exceed 10 percent of their total lifetime federal salary. That is a lot of money, and you’ve already paid taxes on it.

Interest earned on money invested in the VC is tax-deferred. When you withdraw it, you can roll over that amount into an individual retirement account.

Most people with VC accounts withdraw the money before they retire. That’s a one-time thing. If you take a withdrawal, you must take out the full amount and you cannot rejoin the VC program.

There is one other option with the VC that most account holders don’t choose. That is, leave the money in the account and use it to boost — very slightly — their monthly annuity when they do retire. The Federal Employee’s Almanac (800/989-3363) explains it like this:

“Voluntary contributions with interest may be used to purchase an additional annuity. The amount of this VC annuity depends on the age at which you retire. If you retire at age 55 or younger and do not elect an additional survivor annuity, each $100 will buy you $7 a year of a VC annuity. This amount increases by 20 cents for each full year you are over age 55 at the time you retire. Thus, if you retire at age 60 each $100 will buy $8 a year of VC annuity. At age 62, $8.40 a year and so forth. The VC annuity is payable as long as you stay retired but is not increased by cost-of-living adjustments.”

The VC can be a good deal for some employees who have maxed out their tax-deferred contributions to the federal Thrift Savings Plan and also have a large amount of money they want to put in a safe harbor.

To join the VC program, CSRS employees need to fill out and file a Standard Form 2804 with the Office of Personnel Management.

Pay raises vs. COLAs

The 3.71 percent white-collar federal pay raise that was effective earlier this month should show up in federal paychecks soon. The increase includes a national adjustment, which went to all feds, plus a locality pay adjustment. The amount of the total raise varied from city to city depending on the cost of labor in the private sector in each metro area.

Retired federal workers (under the old Civil Service Retirement System), military retirees and people who get Social Security benefits got a 2.7 percent COLA (cost-of-living adjustment) in the annuity payment they’ve already received. The COLA is indexed to the nationwide rate of inflation. Feds who are retired under the newer Federal Employees Retirement System (FERS) got a 2 percent annuity increase, because of a feature in the law. The COLA for most feds begins when they retire. But for those under FERS, the reduced COLA payments don’t begin until they are 62. Again, that’s the law.

To get the full COLA, retirees and survivors had to have been retired since December 2003. Otherwise, the COLA is prorated on a monthly basis. That’s why feds couldn’t retire at the end of last year and qualify for a full COLA.

Life cycle fund

Sometime this year, perhaps as early as July, federal-postal-military investors will be able to invest in a sixth fund in their Thrift Savings Plan (TSP). This will be called the L Fund. It will balance your investments among the three stock indexed funds, the bond index fund and the Treasury securities fund based on when you plan to start spending money from your TSP account.

Mike Causey, senior editor at FederalNewsRadio.com, can be reached at 202/895-5132 or [email protected]

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