401 (K) or the Pension Plan – Which One Is Right for You?

In these uncertain economic times, having a great pension plan has become more important than ever before. The media is preoccupied with this topic and inundates viewers with plenty of advice as to what constitutes a good retirement plan.

It is imperative to understand the growing trends so that you can chose the plan that’s right for you.  The baby boomers left it up to their employers to figure out the best pension plan for them but the times have changed dramatically. Fewer employers are providing pension plans. Therefore, today’s generation is seeking alternatives for impending retirement.

Pension plans come under the rubric of “defined benefit plans” which are totally funded by the employer at his discretion on your behalf.  The employer will pool in funds from employees and invest the aggregate amount in a finance scheme that will yield a predetermined return given by a formula that crunches parameters like age, earnings, employment period at the company and so on. The advantage of these plans was that they guaranteed a fixed return, but they are now dwindling rapidly and today’s working population must therefore be cognizant with retirement alternatives. 

On the other hand, a defined-contribution plan is now the norm in today’s work environment. Its most common manifestation is the 401(k) plan where both you and your employer contribute funds. However, you have sole discretion where and how the funds will be invested. Since you are vested with self-responsibility, you can decide the amount that will be invested, and if you are lucky enough, the employer will also contribute a similar amount as a percentage of your contribution so that your savings can proliferate more rapidly. However, you are not guaranteed a fixed return and your subsequent earnings will be heavily influenced by your investment decisions.

Did you know about the tax benefits that come with your 401 (k) plan? South Carolina CPA Roberta M. Floor opines that the 401 (k) can allow you to make deductions which lower the taxable income so that less tax amount will be withheld from your pay.

You hit two birds with one stone this way. You can legally avoid paying taxes on contributions and save on taxes while also getting security for your golden years.

There are also tax benefits for different types of 401 (k) plans. For instance, you have the

SIMPLE 401 (k), utilized by businesses employing under a hundred people

The Safe Harbor 401 (k) where the employees enjoy full ownership of any employer contributions

The Traditional 401 (k) plan, normally used by large businesses with sizeable workforces

All these saving plans entitle you to tax savings which are exponentially amplified by time duration. For instance, interest earned on savings accounts will be taxed annually which can be substantial over the course of a decade. But if you direct just $100 every month into 401 (k) account that yields 8 percent interest, then not only will you aggregate savings in excess of $150,000 (tax-free!) over the course of 3 decades, you will also save a sizeable $50,000 in taxes.

For more information on the ideal savings plan that best matches your economic circumstances, feel free to call us today.

3702 Pratt Avenue Bronx NY 10466

(347) 755-2257

info@klbbusinessfunding.com