Ask The Experts: Money Matters

By Mike Miles

VCP and Roth IRA conversion

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Q. I’m a CSRS employee nearing retirement. I have read numerous articles touting the advantages of opening a Voluntary Contributions Program account with up to 10 percent of your lifetime civil service earnings and then converting it to a Roth IRA at retirement. In your professional experience, would you recommend qualified individuals follow this approach? Are there potential pitfalls I’m unaware of?

A. I certainly recommend that you consider it. I don’t know of any pitfalls other than botching up the transactions and violating some rule. I suggest that you pursue it with the help of a qualified tax adviser — the one who will prepare your return for the year.

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VCP

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Q. I have seen various information online that the Voluntary Contributions Program conversion to Roth IRA was still available in 2013. Does anyone know whether this is still the case in 2014?

A. As far as I know, it is still allowed. You should check with your tax preparer before you proceed, however.

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VCP to Roth

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Q. I am confused about the five-year rule for Voluntary Contributions Program funds rolled over into a Roth IRA. If a Roth IRA has been funded for five years, is there still a five-year withdrawal waiting period for funds transferred from a VCP account into that IRA?

A. The five-year clock applies to each conversion, but how it will affect you isn’t clear from the information you’ve provided. The answer depends upon your age and how much you withdraw. I suggest that you read Internal Revenue Service Publication 590 and consult a CPA before proceeding.

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VCP Roth conversion follow-up

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Q. This is a follow-up to a prior question. I had asked whether converting my Voluntary Contributions Program account to an existing contributory Roth IRA would be taxable in light of the fact that I had pretax money in the Thrift Savings Plan. You had advised that it appeared to be a nontaxable event but that I should check with my CPA. I do not have a traditional pretax IRA.

My CPA didn’t know anything about it, so I asked an expert in the field. The expert cautioned me not to roll over my pretax TSP into a traditional pretax IRA prior to the Roth conversion. This would make a portion of the conversion taxable.

This is an important point, as many financial planners will recommend to federal employees that they transfer their pretax TSP to a traditional IRA to provide greater control over investments and tax planning.

Read the rest of this entry »

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VCP conversion to Roth

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Q. I am 66 years old and plan to retire in 2014, at which time I would transfer (convert) my Voluntary Contributions Program monies directly into a newly created Roth IRA. However, I have an existing (non-TSP) Traditional (substantial) IRA (never taxed), and know the Internal Revenue Service will aggregate my Traditional IRA balance for purposes of determining the taxability of this VCP-to-Roth conversion.

If, prior to retirement, I (in 2013) transfer (direct rollover) my Traditional IRA into my existing Thrift Savings Plan account, will those monies now be considered 401(a), and therefore, making my subsequent VCP-to-Roth conversion occur with few tax implications?

A. As I understand the rules, your TSP balance will not be subject to aggregation for the purpose of determining the taxability of your VCP-to-Roth IRA conversion, but you should consult a CPA before going down that path. You may also want to fill in a pro-forma IRS Form 8606 to see how it will look. This is the form used to calculate your tax liability on conversions. Notice that it does not mention an employer-sponsored plan like the TSP anywhere.

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VCP rollover

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Q. I am 73, retiring March 1. Is it possible to transfer or rollover my entire Voluntary Contributions Program balance into my Thrift Savings Plan account at my age?

A. Only the untaxed earnings may be rolled over into your TSP account. The contributions may be rolled over to a Roth IRA account.

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Refinancing and VCP

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Q. I am a 59-year-old federal employee with 34 years of service under CSRS. I am retiring soon and heard about the Voluntary Contributions Program. I don’t have a wad of cash except accessing some of the equity in my home (I have about $200,000 of equity, and I could pull up to $100,000 out).  Is it worth refinancing (at a low 3.5 percent) to access the money and use the VCP to convert it into a Roth IRA?

A. Probably not, unless you need the cash for expenses.

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VCP to Roth IRA

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Q. I retired from federal service last year. The Office of Personnel Management made a direct rollover of my Voluntary Contributions Program after-tax contributions to a Roth IRA, and a direct rollover of my interest earned on those contributions to my Thrift Savings Plan account. However, OPM will not issue 1099Rs documenting these two direct rollovers, forcing me to file Form 4852 “substitute for 1099-R” with my 2012 tax return. This form requires these two direct rollovers to be identified with a distribution code. Of course, the Internal Revenue Service instructions aren’t that clear about which code is appropriate for each direct rollover.   It appears that both Code 7 and Code G are appropriate to use. Is there additional information, applicable guidance or relevant experience to offer regarding the correct codes for these two types of direct rollovers?

A. This is a question for your tax preparer.

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VCP into Roth IRA

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Q. I am in CSRS. Can I still invest after-tax money in the Voluntary Contributions Program and then convert it to a Roth IRA, or have things changed in 2013?

A. To the best of my knowledge, you can.

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TSP maximum contribution or VCP?

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Q. I am retiring in June under CSRS at age 54 after 31 years of service (Air Traffic Provision).  I have been working outside of the country for the past three years as a loaned executive and have had to pay my CSRS benefits out of pocket to keep my CSRS entitlement while outside of the country. During this period, I have not been able to contribute money into the Thrift Savings Plan since my salary is paid by the out of country organization where I am assigned. I will only return to the Federal Aviation Association for one month before I retire. Should I contribute as much as possible to the TSP in that month, or put money into the CSRS Voluntary Contributions Plan prior to my retirement to maximize savings before I retire?

A. Use Form TSP-1 to elect to defer all of your net, pre-tax pay into your TSP account. Contributing money to the VCP account before you retire, and then rolling over the after-tax balance to an IRA and any earnings to your TSP account is an attractive move if you have the after-tax cash handy and can wait the required holding period before withdrawing from the Roth IRA.

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