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Question Headline:

What’s the difference between a 401(k) and a pension plan?

Answer:

A 401(k) and a pension plan are both retirement plans set up between an employee and employer. The main difference is that a 401(k) is a defined-contribution plan, while a pension plan is a defined-benefit plan. What does this mean? A defined-contribution plan means that the amount of money in the 401(k) is dependent on how much the employee contributions to the plan, and the performance of the investment vehicles. These plans are tax deferred, and employees have an $18,000 contribution limit, unless they are 50 years or older. The employer is not required to contribute to a 401(k) plan, however they often do match a percentage of what the employee invests into the plan. With a defined-benefit plan, the employer is required to provide a specific amount of money to the employee once they begin retirement. This amount is fixed, and independent of how the investment vehicle performs. There are number of factors that determine what the fixed dollar amount owed to the employee upon retirement is. Employees can contribute to these plans as well. Pension plans are also tax deferred, and provide a tax break for employers when contributing.

– Wyatt Swartz

– Contributions by Caitlin Lammers

– 7/3/2017