What is an Additional Voluntary Contribution and How Does it Work?

by Investing School on June 11, 2012

If you hold a retirement savings account and have already deposited the amount that your employer will match, any additional contribution is considered an additional voluntary contribution. These deposits are made at the discretion of the individual – however, they can still go into an employer sponsored pension plan. Such contributions can be made to 401(k), 403(b) or IRA accounts and enjoy tax-deferred benefits.

Employers typically indicate a specific percentage of an employee’s salary that will be matched. This does not necessarily equal the amount that an individual is allowed to put aside annually in retirement funds. Placing additional funds into such accounts offers two benefits.

First, an individual can maximize their retirement account contributions, even if they aren’t matched. Second, they increase the value of the account, providing a larger fund from which to withdraw retirement income. Furthermore, if the plan offers tax-deferred status, returns add up tax-free until retirement begins. Putting money into the same account offered by your employer is called an in house AVC.

AVCs can be made in another manner. Free standing AVCs are those that are put into investments outside of the company-sponsored pension plan. This is a good option if an individual wants to diversify their portfolio or desires more control over where their money is being invested.

Clearly, it makes good sense to maximize contributions to any retirement funds you have set up. Whether you opt to do so in house or free standing will depend upon how much risk you are willing to take.

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