Ask The Experts: Money Matters

By Mike Miles

Roth IRA transfers and taxes

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Q. Can one transfer money from CSRS voluntary contribution (post-tax money) to a private Roth IRA without tax obligations? Can the interest be transferred to the Thrift Savings Plan? Is the amount transferred at retirement part of the maximum allowed ($23,000) for someone over 50?

A. Yes, the VC post-tax money can be moved into a Roth IRA without tax. Yes, the earnings can be moved into the TSP, tax-deferred. No, the amount transferred is not considered a contribution.

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Reporting rollover on taxes

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Q. I am retired and made a voluntary contribution to CSRS and then rolled it over to a Roth IRA in 2012, prior to my retirement. Now I’m interested in what I need to do, if anything, on my 2012 tax returns regarding this rollover. Will the Office of Personnel Management be sending me a Form 1099-R? Any advice on how to report on my 1040 will be helpful. Pub 590 (tax year 2011) says that “you do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions to the plan.”

A. We can’t tell you how to complete your tax return. Your tax preparer is responsible for that. If you’re not comfortable doing it yourself, you should find someone who is.

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Voluntary contribution

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Q. Can I make a voluntary contribution and roll it over to a Roth IRA as a retiree? Am I correct that this would have to have been done before retirement? I took a voluntary early pension in 2004 at age 50.

A. You are correct in that you may not make a VC after you retire.

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Rolling VC into Roth TSP

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Q. I am a CSRS employee who is considering retirement in 2013. I have a Voluntary Contributions account and also contribute to the regular Thrift Savings Plan. If I open a new Roth TSP account, would I be able to roll over my Voluntary Contributions account into the Roth TSP at retirement?

A. [The following is a corrected and updated response to the question.] No. The Internal Revenue Code permits designated Roth accounts to accept transfers or rollovers only from another designated Roth account. Roth TSP balances are designated Roth accounts (or are treated like designated Roth accounts). The VCP is not a designated Roth account. Therefore, the TSP cannot accept a transfer or rollover from the VCP into a TSP Roth balance.

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Voluntary contributions

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Q. On several occasions, you have stated that taking your Voluntary Contributions account as additional annuity (which pays about 7 percent to 8 percent depending on age) is not such a good deal compared to investing the money and taking the investment earnings. But would you say that it is a very good deal compared to using the account to purchase an annuity from an insurance company which pays way less than 7 percent to 8 percent (say 3 percent)?

A. It would depend upon the specifics of the annuity you’re considering and your circumstances. It’s impossible to give a responsible answer to such a general question.

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Rolling over voluntary contributions

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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.

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Rolling over VC into Roth TSP

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Q. I am planning on rolling over my voluntary contributions account in the very near future. Can I roll my contributions to the new Roth Thrift Savings Plan once it is operational? I understand that any earnings I have from my VC account can roll over to my regular TSP account.

A. Based on the guidance provided by the TSP so far, this should be possible. We’ll have to see how things develop to be sure.

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Rolling over VC account

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Q: I plan on retiring in 2010 under the Civil Service Retirement System. I have recently opened a voluntary contribution (VC) account but only have put $25 into the VC account. I plan on putting a large amount of money in the VC account once I retire and then roll over only the after-tax contributions in the VC account into a Roth IRA. Will conversion of the VC account into a Roth IRA require that I aggregate my other IRA balances for the purpose of figuring out the taxable amount of this conversion?

A: This is really a question for a CPA, but as I understand it, IRA aggregation will be required.

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