pension & 401k guidance article

What is the Difference Between 401 (k) and Pension?

Let’s face it, no one wants to talk about their retirement plans. However, it is a conversation you must have, regardless of how far you are from actually retiring. So if you want to live a life of comfort in retirement, there are two plans that can work as your safety net for the inevitable future.

We are of course talking about the 401 (k) and Pension Plan. Both 401 (k) and Pensions exist to provide you with retirement income. However, they are different from each other, especially with regards to how they operate.

So let’s understand what pensions and 401 (k) are and determine what makes them different.

What is a Pension?

Pension is essentially a workplace benefit wherein eligible employees enjoy a monthly payment in retirement. Normally, companies require employees to work a minimum number of years with them to be eligible for pension. The company may also require employees to reach a certain age before they can start withdrawing the retirement payment.

How Do Pensions Work?

Typically, pensions are calculated after the employer takes an individual employee’s years of service and overall earnings into consideration. Pensions are entirely funded by the employer and employees usually don’t have to make any contributions themselves. This results in employees having very little control over how they get their pensions. Although monthly payments are more common, some companies allow their employees to withdraw the pension amount as a lump sum.

What is a 401 (k)?

401 (k) is arguably more popular today than pensions as more companies have completely phased out pensions in favor of this alternative. 401 (k) is commonly defined as an employer-sponsored retirement account wherein the employee enjoys the privilege of contributing a percentage of their tax-deferred salary into their own retirement account.

How does a 401 (k) Work?

To understand how a 401 (k) works, you need to understand that there are two different types of 401 (k) plans. Most traditional 401 (k) plan consultants involve tax deductions at the time a contribution is made to the retirement account. On the other hand, Roth 401 (k) plans do not involve tax deductions when contributions are made. However, an employee can still withdraw the money tax-free in retirement.

Pensions VS 401 (k)

Now that we know what both pensions and 401 (k) plans entail, we can clearly distinguish them from one another. As such, we can come to the following conclusions

  • Pensions are primarily funded by employers while 401 (k) are funded by employees
  • While employers enjoy more control over investments for pensions, employees have more control over 401 (k) investments.
  • 401 (k) benefits can decrease over time and its value depends heavily on the decisions made by the employee with regards to investments and withdrawal. Pensions, on the other hand, offer guaranteed income for life.

As you can see, both Pensions and 401(k) plans are different and come with their own set of advantages and disadvantages. As such, it can be difficult to decide which plan will best suit you. Perhaps you can benefit by seeking advice from professional pensions and 401 (k) retirement consultants to help you make the right decision.

You can always count on our retirement plan consultants at Integrated Financial Services to make decisions that financially secure your future.

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