Benefits · Taxes

What to look for in a pension plan

A pension plan allows employees to save for retirement by contributing tax deferred dollars toward a pension account. An employer will often match that contribution. It is important to remember that although all pension plans exist for the same purpose, not all plans are equal.

Not all plans are qualified plans, which means that some plans have the right to discriminate and not guarantee coverage. Some examples of qualified plans include: 401K, 403B, SARSEP (salary reduction simplified pension plan), SIMPLE IRA (savings incentive match plan) & SEP IRA (simplified plan). You want to stay close to these and away from non-qualified plans due to the IRS/ ERISA guaranteed security.

Depending on your income level and expenses will determine how much you are able to contribute toward retirement. Ideally, if your company offers a match for any pension plan, you want to contribute.

If there is no match for a specified period, or no match at all (which is rare), it is still better to contribute something because you do not have to pay tax on most pension plan contributions. Thus, at the very least you are reducing your taxable income and deferring (or avoiding) a higher tax bracket.

Be weary of small company pension plans (of 100 or less employees) because small firms can change contributing amount year after year. This is the case for SEP Plans, as small companies who run SEP plans can base their contributions by how profitable the company is.

Additionally, because a summary plan description is not required and an IRS filing is also optional, it is close to impossible to obtain an official plan summary copy or guarantee valuable distributions.

When picking the right plan, always weigh all the pros and cons as well as discuss with a trusted financial advisor. Look for plans that allow deductions, allow tax deferral, and have an overall good reputation.

There is no perfect plan that works for everyone. But there is a plan that will help everyone save for a brighter retirement!

Click here for limitations toward different pension plan contributions, based on the type of plan, whether joint/single, and additional catch-up deferrals.


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