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Unlike traditional pension plans, in which the employer promises a specified monthly benefit at retirement, 401(k) plans are funded by contributions deducted directly from the employee’s paycheck.
Here's a look at the difference between a pension and a 401(k) plan -- often referred to as a defined benefit plan and a defined contribution plan.
A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. [1] Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employee contributions and, if applicable, employer contributions) plus any investment earnings on the money in the account.
Currently two types of plan, the Roth IRA and the Roth 401(k), offer tax advantages that are essentially reversed from most retirement plans. Contributions to Roth IRAs and Roth 401(k)s must be made with money that has been taxed as income. After meeting the various restrictions, withdrawals from the account are received by the taxpayer tax-free.
With a few notable exceptions, the age of pensions is largely over in the U.S. Traditional defined benefit plans have replaced largely by defined contribution retirement vehicles like 401(k) plans.
Individual retirement account. An individual retirement account[1] (IRA) in the United States is a form of pension [2] provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's earned income for the taxpayer's eventual benefit in old age.
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