Retirement

In general, a **pension** is an arrangement to provide people with an income when they are no longer earning a regular income from employment[|[1]]. The terms **retirement plan** or **superannuation** refer to a pension granted upon [|retirement] [|[2]]. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Called //retirement plans// in the USA, they are more commonly known as //pension schemes// in the UK and Ireland and //superannuation plans// in Australia. Retirement pensions are typically in the form of a guaranteed [|annuity]. A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. [|Labor unions], the government, or other organizations may also fund pensions. Occupational pensions are a form of [|deferred compensation], usually advantageous to employee and employer for [|tax] reasons. Many pensions also contain an [|insurance] aspect, since they often will pay benefits to survivors or disabled beneficiaries, while annuity income insures against the [|risk] of [|longevity]. Other vehicles (certain [|lottery] payouts, for example, or an [|annuity]) may provide a similar stream of payments.

In the United States of America, a **401(k)** plan allows a worker to save for retirement by deporting the savings invested while deferring current [|income taxes] on the saved money and earnings until withdrawal. The [|employee] elects to have a portion of his or her [|wages] paid directly, or "deferred," into his or her 401(k) account. In //participant-directed// plans (the most common option), the employee can select from a number of investment options, usually an assortment of [|mutual funds] that emphasize [|stocks], [|bonds], [|money market] investments, or some mix of the above. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common //trustee-directed// 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested. The title "401(k)" references a section of the Internal Revenue Code. Some assets in 401(k) plans are [|tax deferred]. Before the January 1, 2006, effective date of the designated [|Roth] account provisions, all 401(k) contributions were on a post-tax basis (i.e., no income tax is [|withheld] on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn. With the enactment of the Roth provisions, participants in 401(k) plans that amend can allow some or all of their wages to a designated brokerage account, commonly known as a Roth 401(k). Qualified distributions from a designated Roth account are tax free, while contributions to them are on an after-tax basis (i.e., income tax is paid or withheld on the income in the year contributed). In addition to Roth and pre-tax contributions, some participants may have after-tax contributions in their 401(k) accounts. The after-tax contributions are treated as after-tax basis and may be withdrawn without tax. The growth on after-tax amounts not in a designated Roth account is taxed as [|ordinary income].

An **IRA** is an Individual Retirement Account, and provides either a tax-deferred or tax-free way of saving for retirement. There are many different types of accounts within the world of IRAs, depending on the financial goals and situations of each individual, though traditional and Roth IRAs are the most common choices. A traditional IRA allows tax-deductible contributions of up to $4,000 per year, or more if you are over age 50. Whatever you contribute towards your IRA comes off your yearly income, thereby reducing total tax liability. However, once the money in an IRA is withdrawn, it is subject to standard income taxes and an additional 10% penalty if withdrawn before the age of 59 1/2. An exception is made if the money is used for purchasing a house or to cover approved higher education costs. Standard income tax still applies, but the ten percent penalty is waived. This provides a great investment tool with flexibility for important purchases.

A pension is money you get for when you retire from a company. True or false?