Tax-free government CD, or peel me another grape!

Monday’s column was about a little-known perk, called the Voluntary Contribution program, which is available to only a fast-disappearing group of active federal workers: People under the old Civil Service Retirement System or the CSRS Offset program.

The VC was set up to let feds put after-tax money into a special Treasury securities fund in which the earnings, regardless of the amount, would be virtually tax-free. For years, the VC was known only to a handful of feds outside of the old Civil Service Commission (now OPM). Later on, more people learned about it. Many who did made out — quite legally and wisely — like bandits.

Several readers reacted to Monday’s piece, pointing out that because of some changes over the years interest on the CV accounts isn’t always entirely tax-free. So, we put the question to D.C. area tax expert Bob Leins of the National Institute of Transition Planning. NITP conducts pre-retirement seminars for federal agencies and has its own show (For Your Benefit) here on Federal News Radio each Monday at 10 a.m.

Here’s what Bob said about the CV program:

“Is the VC a tax free savings plan? Yes and no.

“History of the VC:

“The VC was designed MANY years ago to provide modestly paid feds as well as low paid feds an ability to invest in the VC and receive a greater annuity when they retired. The investment in the VC, if invested over a period of time, earned interest on the VC balance. Contributions to the VC should not exceed 10 percent of a federal employee’s lifetime earnings as a federal employee.

“Recent developments:

“Investing in the VC can be done all at once or over a period of time. In economic theory, and more recently in practice, an individual may earn more money after tax by not investing currently in the VC. However, at some point preferably before retirement, the after tax funds could be taken from the investment and invested in the VC. Then immediately the VC funds could be transferred to a Roth IRA. After the funds are invested in a Roth IRA, the earnings become non taxable after meeting a fairly simple test. Funding for the VC could also come from non taxable sources such as inheritance, sale of a home as well as after tax accumulated leave (very easy to do but requires understanding of timing).

“Another somewhat recent development allows the interest earnings in the VC (if any) to be transferred to a traditional TSP where they could remain untaxed until withdrawn.

“Summary:

“Investing in the VC requires knowledge of the facts and circumstances. If the individual is unaware of the facts, they could wind up paying income tax when it can be avoided or at a minimum lightly taxed over on ones lifetime.” Bob Leins

        Read more: Mike Causey

Happy VC Note: After the latest VC column appeared, we got this makes-your- day note:

“I would like to say thanks for your articles on VC. Because of your column (which I wish I had seen earlier) I started a VC account about 15 years ago and have contributed monthly since then. I am nearing the end of my career and now have a decent chunk of money that I wouldn’t have had otherwise. In fact, I just met with Bob Leins last week to review my options as to where to invest this fund when I retire. I told him that you were the only way I had heard about it! Agencies do not inform employees of this opportunity, possibly because new employees under FERS are not eligible. Thanks again.” Cindy C.

The good news about the VC (if you are lucky enough to be eligible) is that it is optional. You don’t have to invest if it isn’t tax- free enough for you. It is optional, not mandatory. But many have and most are very, very glad they did.

NEARLY USELESS FACTOID

By Michael O’Connell

Post Foods’ Grape-Nuts cereal contains neither grapes nor nuts. Instead, it’s made from wheat and barley.

Source: Post Foods

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