Voluntary contributions are resources deposited into a retirement plan, often made on an after-tax basis, allowing employees to defer tax on future earnings. Employers may match contributions, and automatic payroll deductions can help employees save for the future. If after-tax contributions are not allowed, retirement plan income may be taxable.
Voluntary contributions are understood to be the amount of resources that are deposited into a retirement plan. Often these employee contributions are identified as the part of a wage or salary that an employee chooses to put into the plan. Depending on the structure of the plan, the employer may match contributions up to a specified amount, or may include an employer contribution based on other criteria.
In general, the voluntary contribution is made on what is known as an after-tax basis. Essentially, this creates a situation where the employee can defer tax on any future earnings that may be derived from the amount contributed. However, it is important to note that regulations regarding this construct of voluntary contribution may not allow for this option. When that is the case, the voluntary contribution is treated as a pre-tax contribution and will be taxable when the employee begins drawing retirement plan benefits.
The primary function of a voluntary contribution is to allow the employee to incrementally build a financial reserve that can be drawn upon later in life. Retirement plans vary greatly from employer to employer. However, many of them will allow the employee to designate a fixed amount or a percentage of their regular salary to automatically go into the retirement fund as an employee contribution.
This means that the employee never has to keep up with the task of contributing to the plan. A simple payroll deduction is made on behalf of the employee. For people who have a hard time saving money, this approach can be an ideal way to create and build a nest for the future.
In the event that the voluntary contribution process does not allow for after-tax procedures, the individual may be responsible for paying taxes on retirement plan income as it is received. This will depend on the total amount received from the plan in a calendar year, as well as the amount of income received from other sources during the same time period.
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