By Mike Miles
April 2nd, 2012 | Uncategorized
Q. I am a Defense Department employee under CSRS, and am eligible to retire in two years at age 55. I have been making contributions to the Voluntary Contributions Program for many years.
Under VC regulations, upon withdrawing the account (among other options), I can roll over the interest portion of my VC balance direct to my Thrift Savings Program, and receive my contributions portion back as a cash refund, from the Office of Personnel Management. On the upcoming Roth TSP, will there be an option to roll my VC portion, direct to the Roth TSP, in addition to rolling the (taxable) interest portion into the regular TSP?
Separately, regarding the VC annuity option, assuming at age 55 that I have a (hypothetical) $100,000 total balance, I would receive a 7 percent annuity, or $ 7,000 a year. Based on my current total contribution to total balance percentage, my tax-exempt/tax-free exclusion would be about 65 percent, or $4,550, of the $7,000. Taking into consideration the low-interest-rate environment we are in, is this 7 percent annuity a good deal? Over the years, I have read that the majority of employees have not taken the VC annuity as an option. Of course, deciding whether to take the additional annuity vs. the cash, or roll over to the TSP would vary by individual circumstances.
A. Based on the guidance provided by the TSP, so far, and the fact that the VC account is an employer-sponsored, tax-deferred, retirement plan, I expect that rolling the basis in your VC account into a TSP Roth account will be possible, but only time will tell, for sure. The 7 percent payout on an immediate annuity is not the same as a 7 percent annual rate of return on your investment! Don’t forget that if you die, the residual amount left from your original investment will be less than what you put in, and maybe $0. Alternately, in an investment account, you might be able to produce a similar payout over your lifetime and wind up with more than you started with.