Fed haven for mad money

If you are a long-time fed and you’ve hit the lottery, just inherited a bundle of money or have cash parked in a bank account that is is paying zip for interest you may want to study up on the Voluntary Contributions program.

The VC is a good deal for some people. It is not the Thrift Savings Plan.

The VC is open only to federal workers who are under the Civil Service Retirement System and CSRS offset. Unlike the TSP, which you fund via payroll deduction with pre-tax dollars, the VC is after-tax dollars. It operates like a government bank account or super-CD. You open an account and contribute, at your pace, via check. In increments of $25 or more.

With your VC account, you can put an amount equal to 10 percent of your lifetime federal earnings into the TSP.

Since the money you put in was already taxed, you pay tax only on the interest earned. In the past — during times of high inflation — the VC has paid double-digits in some years. Currently the rate (for all of 2012) is 2.25 percent.

The Treasury will set the 2013 rate late this year.

The VC is not a bank account. You can only make one withdrawal. It is designed to be taken out slightly before you retire, or used to boost (slightly) your total annuity. Advantages of the program include:

  • The interest rate (2.25 percent this year) is better than most other places.
  • It is a good place to stash cash you don’t otherwise need.
  • It can be used as a vehicle to contribute to a traditional IRA, or Roth IRA. Those contributions are limited to between $5,000 and $6,000 a year.

Benefits expert Tammy Flanagan says the third choice is popular with VC depositors because once the account is set up they can immediately transfer those funds to a traditional or Roth IRA. That, she says, gets people’s attention “because it’s a way to fund the IRA with more than the normal limit.”

For more on the VC program, and other investment options for workers under the FERS retirement program, listen to our Your Turn radio show today at 10 a.m. EST. Tammy will be our guest and explain how the investment systems work and who they work best for. You can listen on your computer at www.federalnewsradio.com Or if you are in the DC area near a radio you can also hear us at 1500 AM. Listen up. It could be well worth your while.


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