In an employer-sponsored retirement plan, a sponsor might match the cash contributions made by plan members up to a certain percentage. Additional voluntary contributions are cash deposits made by plan members that exceed any matching program. There may be restrictions to the amount of voluntary contributions that may be made, and some plan sponsors might block this altogether. In this case, an individual might create an additional retirement account that can receive contributions. Advantages tied to making voluntary deposits include a larger benefit at the time of retirement and greater resources for any dependents.
When an individual is concerned about the worth of a retirement pension, or simply has the resources to maximize the overall benefit, he or she might make additional voluntary contributions. There is likely some procedure in place at a plan sponsor, typically the employer, that dictates the policies tied to making these deposits. A defined contribution retirement plan structure typically allows additional voluntary contributions. Defined benefit retirement schemes receive these extra deposits less frequently.
Pension benefits for plan members are determined by the investment performance of assets directed into the financial markets, contributions made by individuals and employers, as well as personal criteria surrounding plan members, such as the size of a salary and tenure with a company. A pension administrator may perform calculations to illustrate the anticipated size of pension benefits upon an individual's retirement. If that amount is not adequate to sustain the needs or goals of a retiree, additional voluntary contributions may be the best way to bolster the size of the benefits.
Plan members should anticipate that there will be some cap on the amount of deposits that can be made into a retirement account each year. This threshold will vary depending on the legislative policies in place throughout a region. Making additional voluntary contributions could lead to tax advantages for plan members and the payroll deductions from where retirement contributions derive are likely to be made on a pre-tax basis.
In the event that a plan member faces circumstances that require some financial relief, he or she may not be able to borrow from the voluntary funds deposited in a pension account. That cash might instead only be accessible to an individual upon retirement or upon leaving an employer. In the event that a plan member is deceased, a named beneficiary is likely to be able to access the funds as part of the pension benefit. It may be possible to transfer voluntary contributions to an individual retirement account (IRA) and avoid some tax penalties.