What’s the difference between pensions and IRAs?
The biggest difference between pensions and IRAs is that employers sponsor pension plans. Both the employer and employee can make contributions to this plan. On the other hand, an IRA is sponsored by the owner of the account as an individual. That person is the only contributor to the account, hence the name Individual Retirement Account. Another difference between these 2 accounts is the earnings growth. The earnings growth in a pension plan is tax-deferred, so when you withdraw money you’re going to take on capital gains. As opposed to an IRA, where you actually have two options. First, you can either do the tax-deferred portion, or you can go on the tax-free earnings growth, which is the Roth option.
Another difference between pensions and IRAs comes up when talking about withdrawals for a pension plan. That’s normally a guaranteed income source from your employer. Even if your company is to go under, you are protected in a few different ways. In contrast, for an IRA you are somewhat limited on protection, but you can make withdrawals at any time. However, keep in mind that if you make a withdrawal before the age of 59 and a half, you are then subject to a penalty of about 10%.
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Michaela Dowdy
Financial Planning Associate, Wiser Wealth Management
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