What is the difference between the retirement options?
…is what is known as a defined benefit plan. That is a retirement account that is funded by your employer and promises you a set payout when you retire.
A pension happens automatically per your union’s contract with the employer.
….is a defined contribution plan, meaning that you contribute your own money (pre-tax) and it grows until you retire, at which time you have access to whatever it is worth.
You must sign up for and then actively contribute to the 401(k) plan in order for it to happen. (Your employer may also match funds, depending on the contract.)
How does accessing the money differ?
You may start to draw your pension
…at age 55 if you so choose. (There is no way to access your pension money earlier than that.) If you do so at 55 you will draw a lower amount per year than you will if you wait until age 65. Therefore, you should careful consider whether you want to begin at age 55 or age 65.
At age 65, you can receive your pension for the rest of your life with no penalty. IMPORTANT: you can draw on your pension at age 65 even if you are still working! In fact, you should do so! If you are still working at age 65 and you do NOT begin drawing on your pension, you simply don’t receive it…in other words, you’re simply not access money you could have accessed during that time.
Most pensions have survivorship benefits, meaning that if you die before your spouse, that person will receive a portion of your pension for the remainder of their lives.
You may access your 401(k) money
….at any time, technically. BUT, if you do so before age 59½, you will pay a stiff early withdrawal penalty, typically 10% beyond the regular taxes that you will owe upon withdrawal.
After 59½, you will no longer experience a withdrawal penalty. However, you will still be taxed on the total amount that you withdraw because the money was contributed pre-tax and allowed to grow, tax-free, until it is used.
Please also be aware that there is a required minimum distribution that may apply to you when you reach age 70½. That minimum distribution would determine the minimum amount of money that you’re required to withdraw from your 401(k) plan yearly beginning at that time.
If you die while there is still money left in your 401(k), it goes to whoever you designated as your beneficiary on your account. That money is yours and is therefore considered part of your estate. Be sure you keep your beneficiary current.
Which do you have?
Generally speaking, most retail contracts and many healthcare contracts include a pension element. Other contracts may include a 401(k) in addition or instead of the pension. To find out which you have:
12205 SW Tualatin Rd Suite 200
Tualatin, OR 97062
Investment Savings Plan & Trust
P.O. Box 4148
Portland, OR 97208
Toll Free: 800-547-1314