Difference between 401k and pension
401k vs pension:
It is an unarguable fact that once a person reaches his or her adult age, they must find an occupation which will provide a sufficient income for his or her survival and perhaps also of their family as well. But there comes an age when an average human being grows old and weak and therefore is not able to work anymore. Thus comes retirement after which an employee is no longer required to work. However, without work, it is difficult for someone to provide for themselves and therefore, it is with this factor in mind that certain pension plans have been introduced by various organizations to support their employees in their old age.
401k is a popular pension plan that a retired employee benefits from after his or her employment in the US. Although this pension plan is planned by the employer, it is the employee who contributes to it by way of the employer holding back a certain amount of the employee’s salary as a saving for the future. This amount is then used to fund the pension that the employee receives after retirement. 410k is a popular pension plan among many because of the fact that the deduction made from the salary is tax deferred until the day the employee starts receiving his or her pension monthly after retirement. This is a beneficial plan for many as the employer too matches the contributions of the employee every year with his or her own money and both these contributions gain interest and multiply as time goes by. A person is only eligible to withdraw this amount at the age 59 ½ years old. As 401k is an effective pension plan which provides financial security at old age, the government discourages early withdrawals in this aspect. If one performs an interim withdrawal, 10% of a tax penalty is imposed upon by the IRS (Internal Revenue Service) with the aim of discouraging individuals from early withdrawal. One can also obtain loans not exceeding $50,000 from the vested account balance, but they must be paid within five years of time.
The pension plan has existed from time immemorial and it is a plan which an employee can benefit from after his or her retirement. During the time of the employment, the employer himself makes contributions towards the pension fund of the employee and the amount that he or she contributes is dependent on the employee’s actual salary.
Difference between pension and 401k
A pension plan is an indispensable financial safety net for any person during their old age when they are no longer able to fend for themselves. This is why several pension plans have been introduced to the employees to provide them the financial security that they so need during their retirement. 401k and the pension are two such pension plans which have been introduced by various organizations as a means of providing the ease of mind that their former employees so require when they are old and feeble.
The difference between 401k and the pension is that while in the 401k, the employee himself is require to contribute towards the fund, it is the employer who contributes towards the pension fund of the employee. The amount that the employer contributes depends upon the salary of the employee as well as the number of years that he has worked in that particular organization. However in the case of 401k, it is the employee who chooses to either increase or decrease the amount of money that is being held back by the employee for his old age. Thereby in the case of 401, the employee himself is in control as he is the one who determines his financial security after retirement.
Another more significant difference between the two plans is that in a pension plan, the employee is sure to receive a certain lump sum when he or she retires. However, one cannot guarantee the same with 401k. This is due to the fact that the amount that the employee gets is dependent upon the contribution that he has made towards the fund and the constantly vacillating interest rates of the market. Therefore, while a pension would be a more surefire way to gain some amount of money, the success of the 401k plan depends upon the hands of the employee.
No related differences.