This last of four columns discussing the CSRS Voluntary Contribution Program (VCP) examines how the VCP annuity is taxed. As discussed in a previous column, one withdrawal option for a VCP account is a VCP annuity.
Those CSRS or CSRS Offset employees who receive their VCP account in the form of a VCP annuity will have their VCP annuity treated separately from their regular CSRS annuity. Each year, the Office of Personnel Management (OPM) sends CSRS annuitants a Civil Service Annuitant (CSA) 1099-R, showing how much of the annuitant’s CSRS annuity comes from the regular CSRS annuity and how much comes from the VCP annuity. The taxable and tax-free portions of the annuities are calculated according to the IRS’ Simplified Rule. The Simplified Rule worksheet is presented below. Note in the worksheet:
Line 2. “Cost in the plan” is the VCP annuitant’s total contributions to the VCP, all of which have been taxed.
Line 3: “Age at the annuity starting date” is the VCP annuitant’s age on the first VCP annuity payment date for a self-only annuity, as shown in Table 1. The “combined ages” are the ages of the VCP annuitant and the survivor VCP annuitant on the first VCP annuity payment date when a survivor annuity has been chosen, as shown in Table 2.
Line 3: Once the monthly “recovery of cost” is calculated (the number of monthly payments it takes to recoup the VCP participant to recover the total contributions made to the VCP), that number never changes.
The following example illustrates this:
During her 37 years of federal service, Carol contributed $75,000 to the VCP. When she retired on May 31, 2019, at age 60, Carol elected to receive a VCP annuity of $6,000 per year, or $500 per month. For 2019, Carol received six payments of $500 each for a total of $3,000. She wants to determine how much of her $3,000 payment is taxable. She uses the Simplified Method:
Annual tax-free portion: $1,452 (line 5)
Annual taxable portion: $1,548 (line 9).
SIMPLIFIED METHOD WORKSHEET (SOURCE: IRS PUBLICATION 721, which may be downloaded here)
|1. Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a||1.________|
|2. Enter your cost in the plan at the annuity starting date.||2.________|
|3. Enter the appropriate number from Table 1 below. But if the payments are for your life and that of your survivor annuitant, enter the appropriate number from Table 2 below.||3.________|
|4. Divide line 2 by the number on line 3||4.________|
|5. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6||5.________|
|6. Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year||6.________|
|7. Subtract line 6 from line 2||7.________|
|8. Enter the smaller of line 5 or line 7||8.________|
|9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero.||9.________|
|10. Add lines 6 and 8.||10.________|
|11. Balance of cost to be recovered. Subtract line 10 from line 2.||11.________|
Table 1 for Line 3 Above
|If your age on your annuity starting date was||Then enter on line 3|
|55 or under||360|
|71 or over||160|
Table 2 for Line 3 Above
|If the annuitant’s and survivor annuitant’s combined ages on your annuity starting date were||Then enter on line 3|
|110 or under||410|
|141 or over||210|
|1. Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a||1. $3,000|
|2. Enter your cost in the plan at the annuity starting date.||2. $75,000|
|3. Enter the appropriate number from Table 1||3. 310|
|4. Divide line 2 by the number on line 3||4. $242|
|5. Multiply line 4 by the number of months for which this year’s payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6||5. $1,452|
|6. Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year||6. 0|
|7. Subtract line 6 from line 2||7. $75,000|
|8. Enter the smaller of line 5 or line 7||8. $1,452|
|9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero.||9. $1,548|
|10. Add lines 6 and 8.||10. $1,452|
|11. Balance of cost to be recovered. Subtract line 10 from line 2.||11. $73,548|
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Raymond James does not offer tax or legal advice. Information provided is not approved or endorsed by the Civil Service Retirement System (CSRS). Investments and strategies mentioned may not be suitable for all investors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The hypothetical examples are included for illustration purpose only and does not represent an actual investment. Actual investor results will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.