Q. I’m a CSRS employee with an active Voluntary Contributions Program account. My year-end contributions statement of 12/31/2019 shows a total earned interest of $32,076 since I opened the account. If I convert the entire balance of my VCP account to a Roth IRA, will I be responsible for paying taxes on the $32,076 earned interest at the time of conversion?
A. The conversion will be reported as taxable ordinary income for the year in which it is constructively received. Interest refunded to you is subject to a mandatory 20 percent tax withholding. However, if the interest on the voluntary contributions account is at least $200, then you can elect to have OPM roll over all or part of the interest to an Individual Retirement Account (IRA) or other qualified retirement plan to defer income tax. A direct payment to the employee will not defer the tax, even if the employee chooses to deposit it in an eligible IRA after receiving it.
