October 13, 2010 — For feds under the Civil Service Retirement System and CSRS Offset, there is a government version of a certificate of deposit that offers 3.125 percent interest in 2010.

It’s called the Voluntary Contributions Program.

Federal benefits expert Tammy Flanagan, the guest on Your Turn with Mike Causey, said feds contribute to the VCP for three main reasons:

• The interest rate is better than any rate through a bank, with the country’s best bank interest rate at 1.76 percent.
• Feds can contribute to their VC account with “money that is sitting in a bank account or inherited,” not through their paycheck, Flanagan said.
• The VC account can be used as a vehicle to contribute to a traditional IRA or a Roth IRA. IRA contributions are limited to $5-6,000 a year. With the VC program, feds can put in as little as $25 or up to 10 percent of their total lifetime salary. Once the VC account is set up, they can immediately transfer those funds to a traditional or Roth IRA.

  “That third choice is getting people’s attention because it’s a way to fund the IRA with more than the normal limit,” Flanagan said.

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How to open a VC account
You can open a VC account by filling out Form 2804, available through the Office of Personnel Management.

Flanagan pointed out that if you owe money to your retirement fund, then you must pay that back first before you can start contributing to your VC account.

Once the account is set up, you can put money into the VC account by check or through www.pay.gov.

TSP vs. VC
The Thrift Savings Plan is an independent agency, whereas the VCP is managed by OPM, Flanagan said.

The main difference is TSP is funded by pre-taxed money from your paycheck and that’s the only way you can contribute, but the VC program is funded by taxed money and it’s not deducted from your income.

The VCP is not a bank CD, although similar to one. You cannot withdraw a portion of your VC funds.

“If you’re an employee and you’re making contributions to this account, you can’t take it out and put it back in and take it out and put it back out. It’s a one-way street,” Flanagan said. “Once you take it out, the account’s closed.”

As an added bonus, Flanagan discussed the best dates to retire this year and for 2011. Getting it right can be worth thousands of dollars to you!

If you have questions on the VCP or the best date to retire you can email Mike or call the show live from 10 – 11 a.m. Wednesday. The phone number is (202) 465-3080.

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