3 Alternatives to Pension Plans

Finding an employer that offers a pension plan is getting more and more difficult. Most employers have gotten rid of their pension plans in favor of other retirement accounts. If you can't find a company that offers a pension plan, then you will have to start another type of retirement account. You cannot really base your decision on where you will work for the next several years on whether or not they have a pension plan. Here are a few retirement alternatives to a pension plan that you could look into.

1. 401k

The most common form of retirement account when you work for someone else is the 401k. 401k's are offered by employers because they are beneficial to both the employer and the employee. The employee doesn't have to fund as big of a portion of the employee's retirement as they do with a pension. However, they still help the employee by making matching contributions. If you start a 401k, you can actually deduct a certain percentage of your paycheck tax-free each pay period. The money will go into the 401k and accumulate tax-free until you withdraw the money. You are eligible to withdraw once you are past the age of 59 1/2.

The employer will often make a contribution that matches yours up to a certain percentage. When they do this, it allows them to save money on their taxes as the contributions are tax-deductible. This plan also allows you to put more money in each year than any other retirement plan. Typically, the maximum contribution is $16,500.

2. IRA

The Individual Retirement Account or IRA is another popular alternative to a pension. This type of account is not provided by your employer and is started on your own. You can start an IRA through a number of different financial institutions. With this type of account, you have much more control over your money. You have more investment options and you can move your money around between them freely. With a 401k, you only get a few options and can rarely move your money. The maximum that you can contribute in a calendar year to your IRA is $5000.

3. Roth 401k or IRA

The Roth version of each of these types of accounts provides a different benefit. With the regular 401k and IRA, you put tax-free money into the account. When you reach 59 1/2, you can withdraw the money. Once the money is withdrawn, you will be responsible for paying taxes.

However, with a Roth 401k or Roth IRA, the exact opposite is true. You start the account with after-tax money. Then once the money is in the Roth account, it accumulates tax free. Once you reach the age of retirement, you can withdraw the money without paying a dime in taxes. With this type of account, you can live tax free once you reach the age of retirement.