Q. I am a CSRS employee, and I plan on retiring in 2016. I currently have 37 years of service. If I elect to contribute money (up to 10 percent of my lifetime earnings) to the Voluntary Contribution Program, I understand one option is to receive an annuity that will pay a yearly amount of approximately 9 percent of my contribution amount. I will be 65 in December of 2016.
I read that there are other options available to me such as converting the lump sum to a ROTH or just cashing in the entire amount at retirement. However, the annuity option seems simple and will work for me as a nice supplement to my pension. Since my contributions to the VCP are after tax, will the 9 percent annuity be proportioned into tax-free and taxable amounts? Will the 1099 that I receive show my total pension and the amount that is taxable? I will not elect the VCP annuity option if I have to pay tax on the entire annuity.
A: The annuity payments will be partly tax-free return of basis, and partly taxable ordinary income until you have recovered all of your contributions. There is a special formula for calculating the tax-free part of each payment, but an easy way to estimate it is to divide the tax-free basis at in the account at the time you start payments by your life expectancy x 12 at the same time.
