IRA vs. Pension: Which Retirement Plan is Right for You?

Pension is a broad word for a retirement savings fund that may have specific tax benefits. Depending on how the pension is administered and the state you live in, tax benefits may differ. Your employer may also determine the type of benefits you receive, such as a 401K account or an IRA account. An IRA is a specific tax-structured account that will allow you to grow your money with minimum penalties.

Tax Advantages of an IRA

Most contributions into an IRA are tax deductible. Once funds are in an IRA account, they will also grow tax free until you decide to remove the funds. There are limits to how much you can contribute each year, but IRA limits tend to be very high. This means you will be able to set aside a large portion of your income each year and the government will essentially pay you to do so. You keep the funds in your pocket, reserved for later in life, instead of paying them in taxes each year.

Electing an IRA

Ultimately, an IRA is just one of several investment options for your retirement. There are also different types of IRAs, such as traditional and Roth IRA accounts. Each of these options provide specific benefits. A traditional IRA is best for a person who is in a higher income bracket, is not receiving contributions from an employer, and believes his or her tax rate will be lower upon retirement than it is today. A Roth IRA is specifically designed for lower-income individuals to pay taxes up front. 401K options are typically best for people who are receiving a large employer match. For example, it is common for a person to roll over a 401K into an IRA after leaving a company late in his or her career.