CSRS VCP to Roth IRA
CSRS Voluntary Contributions Transfer to a Roth IRA
While the CSRS VCP program was originally designed to allow CSRS to put more money in and buy an additional retirement annuity, the big deal about the CSRS VCP program these days is that you can use it to max-fund a Roth IRA.
This is a fantastic benefit for CSRS, especially CSRS who thought they made ‘too much money’ to have a Roth IRA.
Using the CSRS VCP to Max-Fund a Roth IRA
The CSRS Voluntary Contributions program is a great way to max fund a Roth IRA, and we’ve helped many of our clients do this.
Most folks would never even think to use the VCP this way. (but then again, most folks haven’t even heard of the CSRS Voluntary Contributions program at all!) But really what we’re doing is no secret - it's just using the tax laws to our clients advantage.
I’ll share with you the basics of this transfer here, and if you’re still interested in more information you’ll find the book to be very helpful.
But let’s step back and look at a simple question first...
Why Would I Want Money in a Roth IRA? What’s the Difference Between a Traditional IRA and a Roth IRA?
The basic difference between a Traditional IRA and a Roth IRA has to do with taxes.
In a Traditional IRA the money you put in is tax-deferred. You’re making a trade - instead of paying taxes now when you put the money in, you’re going to pay taxes later when you take the money out.
With a Roth IRA, you’re paying taxes on the money now when you put it in, and if you leave it there long enough, you can take the money and its interest out tax-free.
So, a big question here is when do you want to pay the taxes? Now... or later?
Most people have all of their retirement money in tax-deferred accounts like Traditional IRAs, the TSP, other 401(k)s, etc. When you take the money out at retirement, you have to pay taxes.
And then think of your federal pension - almost all of your FERS or CSRS pension will be taxable. And chances are that most of your Social Security income will also be taxed when you receive it.
That means that almost all of your money will be subject to ordinary income taxes in retirement.
The next big question is where do you think taxes are going?
Right now, we are in an era of historically low tax rates. Looking at our government’s current fiscal situation - do you believe they can do anything *but* raise tax rates?
You are free to have your own opinion about where you think tax rates are going. I personally think tax rates will be rising significantly in the future.
So back to our first question, when do you want to pay taxes? Now... when they are possibly at their lowest rates in history? Or later, when they are likely to be much higher?
If all of your retirement money will be taxed at ordinary income tax rates when you take it out... what happens when taxes go up?
You’ll have to either reduce your lifestyle, or take out more money to cover the additional taxes. And if you’re taking more money out of your retirement accounts than you had planned, it means your money won’t last as long.
If all of your retirement money is tax-deferred and taxes go up, you’ll have no choice but to pay the higher taxes.
But what if you had money in a Roth IRA that you were able to take out tax free?
If taxes went up, you could choose where to take your retirement income from. You would be in control.
Everyone’s personal situation is different - and it also doesn’t have to be all or nothing - it may make sense for you to have both a Traditional and a Roth IRA. For most people, it makes a lot of sense to have some retirement money in a Roth.
So How Do I Get Money in a Roth IRA?
Roth IRAs are chock full of limits. If you qualify to contribute to a Roth IRA, your annual contributions are limited to either $5,500 or $6,500 a year, that’s it.
And depending on your income, you may not be allowed to make a direct contribution to a Roth IRA at all.
But there is another way to get money into a Roth IRA. Conversion.
You can transfer money from another ‘qualified’ account to a Roth IRA.
Can You Still Do a Roth Conversion in 2014?
Yes. As of 2014, there are still income limits on who can *contribute* directly to a Roth IRA, but there are no income restrictions on who can *convert* money to a Roth IRA.
In the past, there were income limits on who could move money from another account into a Roth. But all that changed in 2010.
Starting in 2010, and still today (2014), there are limits on who can contribute directly to a Roth IRA - but there are no limits on who can *convert* money from another qualified account into a Roth IRA. And there are also no limits on how much money you can move into a Roth IRA.
What Types of Accounts Can You Convert to a Roth IRA?
There are several different accounts from which you can transfer money into a Roth IRA.
You can move money from a Traditional IRA to a Roth IRA. There is no limit to how much you can convert - except there’s a catch.
When you put money into your Traditional IRA, you deferred the taxes. If you want to move that money into a Roth - you’ll need to pay the taxes when you make the transfer.
This still might make sense for you - but just keep in mind if you move $100,000 from a Traditional IRA to a Roth IRA, your taxable income that year will be increased by $100,000 - which would almost certainly bump you into a higher tax bracket.
Even with all this, it still may make sense for you - but you should understand the consequences first.
As a general rule of thumb, if you can’t afford to pay the taxes on a transfer to a Roth out of your cash-flow or other savings, it does not make sense to do a transfer.
You could also move money from your TSP into a Roth IRA. While some federal employees may be eligible for an Age-Based In-Service Withdrawal - you’re still going to have to pay taxes on all of the money you transfer.
But CSRS (and CSRS Offset) federal employees have another type of account that they can transfer to a Roth IRA: the Voluntary Contributions Program.
...Enter the CSRS VCP
The CSRS VCP is also a ‘qualified’ account, like a Traditional IRA or your TSP. But it’s got some key differences: taxes and limits.
First, taxes. The money you put in the CSRS VCP is after-tax money. However, your contributions to the CSRS VCP do earn a small interest rate that is tax-deferred. So there will be a mix of after-tax and tax-deferred money in your account. This can be tricky, so we cover this in detail in the book.
Second, limits. While you are limited in how much you can put into the CSRS VCP - it’s a much higher limit than how much you can put into other qualified accounts. For example, you may be limited to $6,500 a year for a Roth IRA, or $22,500 a year for your TSP. Your VCP limit is not by year, but rather set at 10% of your CSRS basic pay over your entire career. For many CSRS, their VCP limit is well over $100,000.
Do You Make “Too Much Money” for a Roth IRA?
In the CSRS retirement classes I teach, lots of people are familiar with Roth IRAs. But many thought they made ‘too much money’ to have a Roth - so they stopped looking any further into Roth IRAs.
Let’s look at an example where you make ‘too much money’ to qualify for a Roth IRA. Say you’re married, and between the two of you, you make $200,000 a year. You would not be eligible to contribute directly to a Roth IRA.
However, if you qualify for the CSRS VCP - you have another option. Let’s say you have $40,000 that you’d like to put in a Roth IRA if you could - but since your income is too high, you’re not even allowed to put in the regular $5,500 or $6,500 a year.
You could open a CSRS VCP account. Fund it with the $40,000. Open a Roth (but don’t fund it yet). File the paperwork to withdraw your VCP and transfer the contributions to your Roth IRA. While this is not the most common way to fund a Roth - we’re still playing by all of the rules.
While that’s the basic idea - it’s really important to get all of the details right. It’s not a complicated process, but if you get it wrong it could big tax trouble.
Many people asked if they could pay me to just oversee their VCP-IRA transfer - but that’s not what I do. I only do full financial planning with a select group of clients. I don’t do little bits here and there. But there were so many people asking, I wanted to find a way to pass on my experience so that others could benefit. That’s why I wrote the book.
In the book, I cover the step-by-step process of transferring money from your VCP to a Roth IRA.
Before you do anything, I think it’s important to understand all of your options. Then and only then can you make the best decision for your personal situation. So in the book, we cover all of your VCP options, but we also talk about IRAs and Roth IRAs and the pros and cons of each.
But the book is not for everyone.
Don't Buy This Book If...
- Don’t buy this book if you’re a FERS. The VCP program is only for CSRS and CSRS Offset employees. FERS don’t even have the option to do the CSRS VCP.
- Don’t buy this book if you don’t have more than $6,500 to put move into a Roth. The CSRS VCP to Roth transfer is a great way to max-fund a Roth. But if you don’t have any money to move into the CSRS VCP, this book isn’t for you. If you only had $1,000 to put in the VCP, it’s probably not worth your while. And if you qualify for a Roth IRA, just stick the $1,000 directly into the Roth.
This Book Can Help You If...
- You’re a CSRS or CSRS Offset federal employee who wants to know more about the VCP.
- You’ve been looking for information on the CSRS VCP, but still want to know more.
- You want to understand all of your CSRS VCP options before you just jump in and do a transfer.
- You’re financially fit and have been saving money for retirement.
The CSRS VCP to Roth Transfer Makes the Most Sense When...
- You make 'too much money’ to contribute to a Roth at all
- You want to put more than $6,500 a year into your Roth.
Want to See Exactly What’s in the Book?
Take a look and make sure it covers the things you want to know.
Click here to see the full table of contents
If you’re not 100% happy with the book within the first 6 months, I want to give you your money back.
If after you read the book you’re not happy with the book for any reason within the first 6 months after you buy it, I want refund the full amount you paid for the book.
So go ahead, buy the book. I’m confident that you’ll find it to be a very valuable resource. And if you don’t - I’ll refund your money. You have nothing to lose.
The ONLY Book to Walk You Through the Entire CSRS Voluntary Contributions Program
This is the most comprehensive book available on the Voluntary Contributions Program and how to transfer your CSRS VCP money to an IRA or Roth IRA.
If you’re thinking about using the VCP, but want to make sure you’re not missing anything - this book is for you.
Lots of CSRS Retirement guides mention the VCP, but none of them go this far in detail about your VCP choices and their consequences.
If you’re looking for a step-by-step guide to help walk you through the process, this is it.
What Tammy Flanagan Says about "The Best Kept Secret in CSRS"
Tammy Flanagan, Senior Benefits Director of the National Institute of Transition Planning, Inc., was kind enough to write the foreword to The Best Kept Secret in CSRS.
Here's what Tammy had to say...
Foreword: From Tammy Flanagan…
Micah Shilanski is the best person I can think of to write about the voluntary contributions program. Micah has a heart for the federal employee and is truly committed to helping employees prepare for a financially secure future. Micah is an accomplished financial advisor who takes advantage of modern technology in his practice and strives to provide clear information to help his clients take charge of their future. This publication is a further example of how Micah took the time to thoroughly analyze the benefits of the voluntary contributions program for federal employees covered by the Civil Service Retirement System and lay out the details of this program in a way that anyone can understand.
Why write a book that only 10% of the current federal workforce will need? It was a good idea because if you are one of the remaining employees covered by the CSRS, then you need this information. Micah saw a need and he filled it when he put together the first edition of “The Best Kept Secret in CSRS.” Now, Micah has expanded and improved his first edition to share his experience with other federal employees, like you, who have learned of the advantages of participation in this unique investment opportunity.
Although the Office of Personnel Management provides information about this program at www.opm.gov, you will not find information there about using this program as a financial planning tool to help you achieve your retirement goals. Micah will walk you through the mechanics of getting your money into and out of the voluntary contributions program so that you will be able to use these funds in ways that you were not aware were possible.
I met Micah several years ago when I came to Anchorage to present a retirement class to federal employees working in Alaska. I asked Micah to help me explain the transition from COLA to Locality pay which was something new for the employees of Alaska and was a topic that I had very little experience. He was not only willing to help, but he did a fabulous job. Having worked with Micah - and I even had the privilege of meeting his beautiful wife, Kelly and his adorable children - I can highly recommend this publication. If you are covered under the Civil Service Retirement System (or CSRS Offset), this book is worth your time to read so that you will be able to use the voluntary contributions program to supplement your retirement savings.
Senior Benefits Director
National Institute of Transition Planning, Inc.
Author of the weekly Retirement Planning column at www.govexec.com
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