What Is a Fully Funded Retirement Plan?

When a retirement plan is fully funded, it's the result either of money you've contributed or of cash deposited by your employer. A fully funded retirement plan is one in which the participants — either the plan member or plan sponsor — are maximizing the available resources to adequately prepare for your retirement. Once you or your employer have done your part to get the plan well-funded, it's up to the investments in which the money is directed to keep the funding status strong.

The beauty of a fully funded defined benefit pension plan is that it's the responsibility of the plan sponsor, which is usually the employer, to provide the cash deposits. A fully funded pension is one with a 100 percent funding status, which means there's enough dough to cover retirement liabilities. If a pension's at least 80 percent funded, it's considered healthy. The average funding status for local pension funds is only 69.9 percent, according to a study conducted by The Center for Retirement Research at Boston College.

Unfortunately, a fully-funded pension can give you a false sense of security. You are trusting your employer to make good investment decisions on your behalf. If your company files for bankruptcy, the Pension Benefit Guarantee Corporation will step in and pay your benefits, but they have a maximum benefit amount that may not be as much as you were expecting. You will get a statement from your employer each year that provides information on how well the fund is performing. Review your statement to decide whether you should be considering alternative investment options.

If you happen to be part of a defined contribution plan, such as a 401(k), you're primarily responsible for the funding status of the plan. You can't just direct 100 percent of your paycheck into the plan, however, because the U.S. Internal Revenue Service puts a cap on deposits each year. For instance, for tax year 2018, the cash contribution limit was $18,500, which represented a $500 increase over the previous year's limit. If you make the maximum allowed contribution and you take advantage of any matching programs that your employer has in place, your 401(k) plan is fully funded.

If your employer doesn't provide a retirement plan, you might invest in an individual retirement arrangement. A traditional IRA and a Roth IRA both would be considered fully funded if you have made the maximum allowed contribution, which for tax year 2018 is $5,500 if you are under age 50 and $6,500 if you are age 50 or older.

A Roth IRA is funded with after-tax income, but you pay no tax on earnings and withdrawals — assuming you take no distributions until the account has been open for least five years and you are at least 59 1/2 years old.

With a traditional IRA, you may deduct contributions up to the maximum allowed amount, but you must pay income tax on contributions and earnings at the time of withdrawal.