I still remember the first time I filed taxes for my business. In addition to having no idea what a write-off really was, I also didn't worry too much about guessing on the numbers. A few government audits later, I discovered what it really meant to do things the right way. Over the years, I have met lots of business owners that weren't too worried about fudging the numbers, and nearly all of them have run into problems. Proper accounting is important, which is why I created this website dedicated to business accounting. I know that if you learn the right way to do things and focus on integrity, your business can avoid a world of problems.
Some employers, instead of offering a 401(k) or 403(b), offer their employee pension plans. Pension plans are often offered through the state government, jobs that are supported by unions, and jobs through larger companies, although companies of all sizes can offer pension plans. If your employer offers a pension plan, you need to understand how it works and how it fits into your overall retirement plan.
#1. You Make Direct Contributions
To start with, you help fund your pension plan just like you would with a 401(k) contribution. You will be required to make a contribution to your employer's pension plan through a payroll deduction. Unlike with 401(k) plans where you can increase the amount you put away in order to save more for your retirement, with pension plans, there is generally a set amount that you contribute to the account in order for a specific return on your investment.
#2. Pension Funds Have Various Funding Sources
Pension funds have various funding sources. To start with, you and other employees contribute to the pension fund through direct deductions from your payroll. Union-based pension funds are funded through the payment of union dues, which can be arranged to come out of your paycheck. When large corporations sponsor pension funds, they are usually funded by a combination of contributions from individual employees and from the corporation itself.
#3. You May Be Able to Borrow Against Your Pension Fund
Some, but not all, pension funds are set up to allow you to borrow against your pension fund. In those cases, your contributions to the pension fund are used like a line of credit that you can borrow against, but you have to pay it back within a set time frame, usually with interest paid as well.
#4. You Become Vested Over Time
You are always vested in the contributions that you made from your own paycheck into the pension fund. Usually, after a set number of years, you also become fully vested or have ownership over the contributions that your employer made to the retirement fund.
#5. You Have Options If You Leave Your Job
If you leave your job, you have various options for what to do with your pension fund contributions. You can keep them in place and leave the account open to draw upon when you retire. This can be a good option if you were with the company for a significant amount of time. You can also roll over to a new employer's plan or an IRA plan. These are good options if you were only with the company for a few years; rolling over contributions are a good way to keep them together.
Retirement pension plans are offered through unions, corporations, and often state and local governments for their workers. You are always vested in the money that you contribute, and over time the money your employer contributed becomes vested with you as well. One big advantage of a pension plan is that you can borrow against it for quick cash, similar to a line of credit.
The most important thing to keep in mind is that a pension fund is just one piece of the retirement puzzle. It may be a big or small piece of your retirement puzzle depending on the number of years you contribute towards it; however, it shouldn't make up the entirety of your retirement plan.
Share1 November 2018
