Additional Voluntary Contribution (AVC)
Additional voluntary contributions are any tax-deferred donations an employee makes to his or her retirement savings account. These deposits are called additional and voluntary because the money is in addition to the original deposit by the employee and the amount the employer matches. However, there is a limit to the additional voluntary contributions.
Additional Voluntary Contribution Details
Usually, when an employee has a retirement account through their employer, a certain amount from each paycheck goes into the account. The employer also matches that amount each time. Anything the employee puts into the retirement account that is over the matched amount is an additional voluntary contribution.
There are limits to how much a person can put into a retirement account and, therefore, limits to additional voluntary contributions. The IRS rules for 2020 and 2021 are that an individual can only contribute a maximum of $19,500. If you are 50 years old and older, you can make a catch-up contribution of up to $6,500 for both 2020 and 2021. If you have a SIMPLE IRA, you can only contribute a maximum of $13,500 for 2020 and 2021.
The limits for retirement plans sponsored by an employer are higher. These amounts do not include the matching amounts that employees receive. The IRS says an individual employee can contribute $6,000 to IRAs in 2020 and 2021. Employees over 50 years of age and over can put in a catch-up contribution of $1,000 in addition to the maximum.
Example of Additional Voluntary Contribution
John Smith is 40 years old and has a 401k retirement plan through his employer. John contributes $1,000 from his monthly paycheck to his account. His employer also matches that amount. This means that he is only contributing $12,000 to his retirement in a year. Because the IRS dictates an individual can contribute a maximum of $19,500, John can contribute an additional $7,500 as an additional voluntary contribution.
Significance of Additional Voluntary Contribution
The thing that any person needs to be careful with is taxes. If someone goes over the additional voluntary contribution limit, the IRS starts imposing taxes. Also, the additional voluntary contributions are taxed or not based on the type of retirement account the person has.
So if you have a tax-deferred retirement account, it means that nothing will be taxed until you start to take out money from your account. But the moment you start to withdraw funds from your account for retirement, the IRS starts applying taxes. Any additional contributions, investment returns earned from the time it was put into the account until you start using it for retirement are subject to a 6% levy.
So as you are calculating what you need for retirement and if you want to contribute any extra money to that account, be sure to know the maximum amount you can put in each year. You also need to make sure you are planning to have enough or at least some extra for any taxes that may apply when you retire and start accessing the funds in your account.