What is a Retirement Contribution?

Retirement contributions are any amounts that are deposited into a structured retirement pension or plan. In situations where an employer manages the plan, it is not unusual for the business to deposit a matching retirement contribution for every contribution made by the employee. Depending on the type of retirement fund or program that is involved, there are often tax advantages for both the employer and the employee that are earned when making regular contributions.

The idea behind a retirement contribution is to create a financial resource that can be utilized once an individual has reached the age of retirement and chooses to leave the work force. There are many different ways of making these contributions. One of the more common approaches is to have a fixed amount deducted automatically each pay period, with the amount forwarded to the retirement plan chosen by the employee. Other people choose to make sporadic contributions to various types of accounts throughout the year, when and as they have money that is not required to meet basic living expenses. In most cases, each retirement contribution adds to the value of the resource, and generates some type of return in the way of interest.

In order for each retirement contribution to generate some type of tax advantage, it is important that the funds be deposited in a qualified retirement plan. This plan may be one that is offered through an employer, but it can also be a savings or pension plan that meets specific criteria established by a national tax agency. Often, tax laws allow funds deposited into these approved accounts to be deducted from the amount of income that is used to determine taxes due for the period. This effectively allows the individual who is making the retirement contribution to delay paying taxes on that sum until it is drawn out of the account in later years. Consulting a tax expert will help an individual identify how to obtain the best tax benefit while making regular contributions to a retirement plan.

Determining the amount of a retirement contribution requires determining how much income is required to effectively manage all monthly debt obligations and provide for such necessities as food, clothing, and shelter. Many people choose to have an employer automatically withhold a specific amount each pay period, and forward that amount into the retirement plan on behalf of the employee. If the employer also makes a matching contribution, that amount may be added at the same time, or the employer contribution may be deposited on an annual or a semi-annual basis.