Q: Assume that I am 67 years of age and have 42½ years creditable service under the Civil Service Retirement System.
Assume that I have “maxed out” at the highest grade/step on the current GS pay schedule for my locality area.
Assume that I plan to continue employment until at least December 2011.
Assume that I am married and have no children.
Assume that I have a current balance in the Thrift Savings Plan in excess of $375,000 and have completed my TSP contributions ($22,000) for 2011.
Assume that I have no current monetary obligations of age greater than 30 calendar days and have had no monetary obligations of age greater than 30 calendar days for the previous decade.
Assume that I have the ability to make a $235,000 contribution to the Voluntary Contribution Program under the CSRS.
Assume that I live in a state that currently has no state income tax.
The conundrum with which I am faced is what to do with my VCP contributions to the CSRS upon retirement. I believe that I have the options of:
1. Withdrawing the principal of the VCP contribution not subject to federal income tax along with any taxable earnings on the VCP principal.
2. Rolling the principal on the VCP contribution into a Roth IRA and rolling the taxable earnings derived from the VCP principal into a traditional (tax-deferred) IRA
3. Purchasing a supplemental CSRS annuity (paying 9.4 percent interest based upon my current age of 67) using both VCP principal and VCP derived earnings.
4. Some combination of the above three options.
I just can’t seem to get my mind around the benefits/drawbacks of a Roth IRA versus a CSRS supplemental annuity. I assume that “bear traps” are associated with any of the above-described options.
Can you share some sage financial wisdom upon my conundrum of appropriate disposal of the contributions and earnings from contributions to the VCP at the time of retirement?
A: I recommend that you consider the option of converting the basis in the VCP account to a Roth IRA and rolling the earnings into an IRA (or, even better, your TSP account) as the default option. Use this a benchmark for comparing the other options. The benefit of purchasing an immediate annuity is that it guarantees income for life. The cost is that you give up ownership of the principal and lock in a fixed income stream.