What Is an Additional Voluntary Contribution (AVC)?
An additional voluntary contribution is an employee's payment to a retirement savings account that exceeds the amount that the employer matches.
The employee can make an additional voluntary contribution, up to certain annual levels approved by the IRS. That is, there are annual limits to the amount that the IRS will permit employees to pay in as tax-deferred contributions.
- Whether your employer matches your contribution or not, you can contribute up to the annual limits set by the IRS.
- If you go over the maximum amount set by the IRS, you may owe a 6% excess contribution tax.
- The limit on IRA contributions for tax years 2019 and 2020 is $6,000, plus $1,000 more for employees age 50 and older.
- The limit on most types of 401(k) plans is $19,000 plus $6,000 for those age 50 and over for tax year 2019, and $19,500 plus $6,000 for tax year 2020.
There also is a tax on what the IRS calls "excess contributions" if you go above the limit.
The limit on most types of 401(k) plans is $19,000 a year plus $6,000 for those age 50 and over for tax year 2019, and $19,500 plus $6,000 for tax year 2020.
The limit on IRA contributions for tax years 2019 and 2020 is $6,000, plus $1,000 more for employees age 50 and older. An exception: The SIMPLE IRA has a contribution limit of $13,000 in 2019 and $13,500 in 2020. This variety of IRA is less commonly available, and can only be offered by businesses with fewer than 100 employees.
Those numbers do not include any employer contribution.
If you have more than one account, the overall limit remains the same.
Understanding the AVC
Keep in mind that this a "qualified" account, meaning that it follows IRS guidelines for programs that include special tax treatment for the employer, the employee, or both.
All but the Roth IRA allow the employee to contribute pre-tax dollars, meaning that they are postponing payment of income taxes on a portion of their salaries until they withdraw the money after retirement. In the case of the Roth IRA, the income taxes are paid at the time of the contribution.
The Employer Match
Employer-sponsored retirement plans can come with an additional benefit. That is, the employer can match the percentage of salary that the employee contributes, up to a maximum. That maximum is about 3% of salary on average, but some companies have a higher match and others have no match at all.
The annual limits on contributions do not include any matching payments made by the employer.
Any personal financial adviser will tell you that it's wise to contribute at least an amount equal to your employer's match or you're "leaving money on the table."
However, you have the option to boost your retirement savings even more by contributing a higher percentage of your salary. Additional voluntary contributions may vary in tax treatment, depending on the type of plan, but if they are made into a tax-deferred account, any returns accumulate tax-free until retirement.
If you contribute more than the limits for the tax year, the IRS considers the extra money to be an excess contribution. A 6% tax will be levied on the extra amount plus any investment returns earned by it every year until it is withdrawn from the account.
To avoid the excess contributions tax, the IRS suggests you withdraw the money and any investment returns it earned before the tax deadline. You'll owe the income tax on it but you'll avoid that special tax.
The simpler option, of course, is to stop contributing when you top out the IRS limit for the year. You've exhausted the available tax-deferred options for the year but you can still invest regularly outside of your employer investment options.