Provident Fund
Categories: Managed Funds
At first glance, a “provident fund” might seem like a fund that can predict the future. And while that would be super awesome and totally useful, it's not quite what that term means.
A “provident fund” is a retirement fund that works kind of like a cross between a 401(k) and Social Security, and you'll see them most commonly in Asia and in Central and South America. Singapore currently has one of the largest provident funds in the world.
There are some variations in types of provident funds, or PFs, but generally speaking, here’s how they work:
There is a compulsory deduction of funds from our paycheck, like there is with Social Security taxes. But instead of going into one huge pool of money, like Social Security does, that deduction goes into a personal retirement fund, like 401(k) deductions do. Our employers also contribute to provident funds, and the government manages the money. Then, when we retire, we get everything that we and our employer have contributed, plus interest.
Not to rain on anyone’s parade here, but we do feel compelled to point out one teeny-tiny little thing. If we’ve got a PF in another country (which it would have to be, since we don’t really do provident funds here in the U.S.), we should probably give our friendly neighborhood tax preparer a call. Provident funds are taxable in the United States, which means we might owe money not only on the chunk of change we get when we retire, but also on the accruing interest.
And here’s another kick in the shin: we’ll also have to pay taxes on the payroll deductions themselves, which we don’t have to do in American retirement fund situations.
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Finance a la shmoop... what is a 401k plan? okay say it with me tax deferred savings
that's it it's really not all that complex for the fancy numbers there all [Complex formula scribbles]
right well when you make money at work you get to defer the tax that you'll pay
on your income or earnings to be paid much later in life and you get to invest
that dough and let it ride tax-free until you take it out of your 401k plan [Money coming out of deferred savings piggy bank]
brokerage account and then at that point well you'll pay ordinary income tax on
your gains well the 401k was a part of the tax code
that was put into motion in the 1980s as the government began to painfully
realize that Social Security wasn't all that secure and that a whole generation
of people who had paid money into Social Security wouldn't get anything back so [People protesting outside the white house]
the government opened the door and made it easy or at least easier for the semi
wealthier masses to save money for their retirement and this was a new idea at
the time a whole new concept like a flying car before then it was mama [Man talking and flying car goes by a window]
corporation who managed the pension money for her employees you know that
sucking off the corporate teat and all that stuff well it fostered a sense of
long-term lifetime loyalty to the company and was all just very you know
IBM like a born in pinstriped blue diapers IBM employee with a hard loyal [Baby boy playing with a flashing rattle]
workforce working away there toiling in the IBM salt mines for 35 years
then retiring at 60 and having smoked a lot dying at age 65 and then that was
all she wrote well that was then this is now it's a different era different
financial pressures so companies don't generally offer pensions today and they
don't generally manage them themselves because the cost of buying real talent
like people who consistently beat the stock market in good times and
bad managing that 401k money is astronomically expensive and generally [Boxing gloves punching the stock market]
speaking corporations can't afford to pay those people nine times whatever
the CEO makes so companies generally contribute some amount of money to a
401k and then they leave it up to the employees to figure out how they want to
invest their retirement savings on their own and that's a good thing most of the
time and you know hopefully it's there when they want to go take it out and
they need the money when they're old and decrepit like like I'm getting...