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Can You Have a Pension and 401(k) and IRA?

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Yes. You can contribute to a 401(k), as well as a traditional Roth IRA, if you have a pension. In fact, it’s probably in your best interest to have all of these accounts to reduce any potential risk associated with pensions.

As discussed several times above, pensions are offered by fewer companies these days. More concerning for the public sector is that funds may run dry.

Can You Have a Pension and 401(k) and IRA?

Additionally, retirement plans like a 401(k) come with the following perks:

  • Unlike pensions, you can set your own contribution schedule. That means you can contribute as much of your paycheck as you’d like as long as it doesn’t exceed annual contribution limits.
  • With a 401(k), you have the power to make your own investment choices. Pensions don’t offer such a luxury. Remember, someone else is behind how your pension is funded and managed.
  • A 401(k) is more portable. As you recall, pensions are based on your salary and tenure with the company. So, if you left the company before meeting the qualifications, you lose pension benefits. Contributions to a 401(k), however, will always belong to you.
  • If you’re concerned with your employer’s future, you’ll want a 401(k). You’ll be able to access these defunds no matter the wellbeing of your employer.

Pensions and Social Security

Will a pension reduce your social security benefits? In most cases, the answer is no. Furthermore, you can still collect both.

“There is nothing that precludes you from getting both a pension and Social Security benefits,” explains the AARP. “But there are some types of pensions that can reduce Social Security payments.”

Let’s say that your pension is what Social Security calls “covered” employment. Because you have paid Social Security payroll taxes, it will not affect your benefits. “The vast majority of Americans work in jobs covered by Social Security.”

But what if you worked for and received a pension from a “non-covered” employer? That means that Social Security payroll taxes were not withheld. “Your benefits might be cut under a rule called the Windfall Elimination Provision (WEP),” explains the AARP.

“WEP applies primarily to federal workers hired before 1984 and employees of some state and local government agencies. (Employees of companies in other countries might also be affected.)” they add. “The formula for figuring the benefit cut is complicated, but the more time you spent in covered employment, the less the WEP reduction. There’s also a cap: Your Social Security retirement benefit can’t be cut by more than half of the amount of the non-covered pension, and it cannot be eliminated entirely.”

There’s also a similar rule known as the Government Pension Offset (GPO). It “reduces Social Security spousal or survivor benefits for spouses, widows, and widowers who also collect a non-covered pension from their government jobs,” states the AARP. “The reduction can be up to two-thirds of the government pension amount, and under this rule — unlike with the WEP — your spousal or survivor benefit could be zeroed out.”

Head over to The Social Security Administration for more details on the WEP and the GPO.

Alternatives to Pensions

We can’t stress this enough. When it comes to your retirement, you can’t afford to put all of your eggs into one basket. And this is definitely true when it comes to pensions.

While there are advantages to pensions plans, the truth of the matter is that they’re becoming less common. To protect your financial future then, you should consider a variety of retirement plans.

Make sure to consider plans that align with your retirement goals. 

You also should pay attention to the tax advantages, fees, withdrawal penalties, and how they can be accessed. After all, you don’t want your retirement funds to be so easily accessible that you’ll burn through them.

If you’re employed, then be on the lookout for plans that have matching contributions from your employer. But, if you’re self-employed for a small business owner, focus on savings options like a Simplified Employee Pension (SEP-IRA), real estate, and a Solo 401(k).

Without further ado, here are your best retirement plans to consider.

Defined Contribution Plans.

A defined-contribution (DC) plan is a retirement plan that was introduced in the early 1980s. It’s typically a tax-deferred plan, such as a 401(k). These plans allow you to contribute a fixed amount or a percentage of your paychecks to a retirement account.

The main advantage of a DC plan is that savings can be invested automatically by taking the money right out of your paycheck. You can also invest in high-return investments, like stocks. And, you don’t have to worry about paying taxes on the gains until you make a withdrawal.

However, there are penalties if you access the funds early. If you’re a teacher or work for a non-profit, you can opt for a 403(b) plan. There’s also the 457(b) plan for state and local government employees.

Just a final FYI — in 2020 and 2021, the contribution limit for each plan is $19,500 ($26,000 for those aged 50 and over).

IRA Plans

Created by the U.S. government, an individual retirement account (IRA) lets you save money for retirement in a tax-advantaged way. There are several such plans, including:

  • A traditional IRA is available to all employees where taxes are paid on the back-end.
  • Roth IRA is a spin on the traditional IRA where your money grows tax-free because you contribute after-tax dollars.
  • Spousal IRA allows the sources of workers also to fund an IRA.
  • Rollover IRA is created if you move funds from another account, like a 401(k), to a new IRA account.
  • SEP IRA is similar to a traditional IRA but specifically designed for small business owners or the self-employed.
  • SIMPLE IRA is perfect for small business owners who want to set up an inexpensive retirement plan for their team.

Contribution Limits for IRAs

“According to the IRS, income limits are based on modified adjusted gross income,” explains Chalmers Brown in another Due article. “For instance, if you’re single, you’re eligible as long as you have a MAGI of less than $124,000. If so, then you are permitted to contribute the maximum amount of $6,000 ($7,000 if age 50 or older) to a Roth IRA.”

“If you earn more than that, you can still contribute to a reduced amount,” adds Chalmers. “The catch? Your MAGI must be between $124,000 and $139,000. But, once you cross that $139,000 amount, you’re no longer eligible.”

“Married couples with a modified Adjust Gross Income (AGI) of less than $196,000 can also contribute up to the limit,” Chalmers says. “If your AGI is between $196,000 and $206,000, then you may qualify to make reduced contributions. Couples with an AGI of $206,000 or higher do not meet the criteria.”

Are There Any Other Retirement Options?

In addition to a DC or IRA, you may also want to explore retirement plans like:

  • A solo 401(k), aka Solo-k, meant for a business owner and his or her spouse that allows you to pick your tax advantage. Sole proprietors, independent contractors, and freelancers all fall under this umbrella.
  • Guaranteed income annuities (GIAs) are annuities that individuals can purchase to create their own pension.
  • Profit-sharing plans may be offered to employees as an incentive to reward loyalty and productivity.
  • The Federal Employees Retirement System (FERS) is a retirement-planning tool consisting of a basic defined plan, Social Security, and the Thrift Savings Plan (TSP).
  • Cash-balance plans are a variation of a defined benefit or pension plan. The difference is that you are promised a hypothetical account balance. It’s often based on your contribution credits and investment credits.
  • General investment options via robo-advisors or online stockbrokers like Ally Invest.
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