Pensions are an essential way to fund your retirement and live comfortably when you stop working. With all the plans available, pension funds can seem a little confusing, but there are some things you definitely need to know to get the most out of your retirement.
Pension Defined
What is a pension and what does a pension mean? Simply put, a pension plan is a retirement savings plan that helps you store up for your future. During retirement, you no longer receive income, but a pension is a pool of funds set aside for your benefit by your employer. Sometimes, your contributions are used to purchase in low-risk investments that create a larger pension fund for when you retire.
Tax Deferred
Pensions are deducted straight from your paycheck and deposited into a plan you can pull from after retirement. When the money is deducted from your check, taxes aren't removed. This means that your pension is tax deferred, but it doesn't mean that your retirement fund is tax-free. After you retire and begin to pull from your pension, income tax is charged on any money that you receive.
Public vs. Private
Certain pensions are limited to your workplace. Working in the private sector gives you access to private pension funds—most commonly a 401(k). Alternatively, those who work in state and local government have access to public pensions. Public pensions are regarded as the better option due to the benefits available, but these funds don’t have strong regulations like private pensions. Private pensions are regulated by the federal government to keep the funds from being mishandled.
Emergency Withdrawal
Emergencies happen, and fast cash can come from your pension in the form of an emergency withdraw. The allowed situations are limited to things like medical expenses, foreclosure or eviction from your home, or funeral expenses for a spouse or dependent. The employer can decide whether or not your situation gives you eligibility to withdraw the funds. Most workplaces require you to return the funds, which means the funds are still tax-deferred, but if you do not pay back the funds, you may be subject to an IRS fee of 10% due to early withdrawal.
Investment Limits
Each year, pension fund limits are reviewed to determine whether the amount should rise. This year, the deferral limit is $18,000 for a 401(k) and 403/457(b) plans and $53,000 for 401(k) contribution. This means that if you have a 457(b), you can only put $18,000 aside in total contributions. If your employer contributes $1,000 to your fund, you can only save up to $17,000. Other pension plans like a 401(k) separate deferred funds from contribution funds, which allow these programs to save more. Some 457(b) and other government pension plans allow for Thrift Savings Plans to bridge the gap for employees.
