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.

Key Takeaways

  • Whether your employer matches your IRA 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 2019 limit for most plans is $6,000. Employees age 50 and older can contribute $1,000 more.

There also is a tax on what the IRS calls "excess contributions" if you go above the limit.

The limit for contributions to most Roth and traditional IRA plans is $6,000 for the 2019 tax year. Those aged 50 and older may contribute $1,000 more under a "catchup" provision in 2019. Exception: The SIMPLE IRA has a contribution limit of $13,000 in 2019.

Those numbers do not include any employer match. If you have more than one account, the annual 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.

Employees can make additional voluntary contributions to tax-deferred savings accounts including a 401(k), 403(b), SEP IRA, SIMPLE IRA, and traditional or Roth IRA.

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.

Excess Contributions

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 easier 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.