If you’re starting to think about the future, you may be looking at different retirement plans and wondering about the difference between a pension and a 401k. While learning about different retirement plan options can be confusing, it can help you decide how you want to go about planning for your future.
Contributions
Before worrying about what will happen in the future, it’s smart to think about the here and now. For instance, while it’s commendable to start contributing to a retirement account as soon as possible, it may be wiser to wait if you have a lot of consumer debt or are barely making ends meet. A 401k, often written 401(k), usually requires employee contribution. Depending on where you work, your employer may match your contributions for up to a certain amount. Instead of having to remember to invest your money every week or month, contributions are taken out of each paycheck. Pensions, on the other hand, are given to employees automatically when they retire. Each employee normally receives a different amount each month. This amount may depend on the worker’s position, hourly wage, hours worked and the number of years that the employee has been with the company.
Managing Your Money
Since pensions are entirely paid by employers, it can be confusing to try to figure out what you’re supposed to do if you change jobs. You normally can’t switch the money that you’ve accumulated to your new pension account, but that doesn’t mean that you won’t get your money. You can usually choose to accept a lump sum from your old employer, elect to receive monthly payments once you retire or decide to rollover any accumulated savings into an IRA account. If you had a 401(k) at your old job, all of the previous options should also be available to you; however, you may also roll your money into your new 401(k) account. No matter which retirement plan you have, you should keep in mind that you may have to pay a lot in taxes or fees if you withdraw your money early.
Borrowing
While retirement plans are supposed to be used in your old age, emergencies and costly situations can arise during your working years. If something happens that requires a large sum of cash, you may be able to borrow money from your retirement plan depending on which type of plan you’re enrolled in. Employees normally aren’t allowed to borrow money from pensions, but individuals with 401(k)s might have some options. If you need cash and have a 401(k), you may be able to borrow up to 50 percent of your vested account balance; however, you’ll only be able to take out a loan for under $50,000. Unless you’re buying a home with the money and intend for it to be your main residence, you’ll have to pay back the money within five years. If you are buying a home, you’ll have a maximum of 15 years to pay off your loan.
You can save yourself a lot of stress by planning for your golden years. Pension and 401k retirement plans are different from each other, but both of them can give you peace of mind about your retirement years.
