Q: What is the difference between a private and state pension?
A: Corporations fund private pensions and taxpayers fund the pensions of state employees. Both public and private sector employees may be asked to contribute to their pensions through payroll deductions.
Q: Is a lump sum pension payment considered ordinary income?
A: A lump sum pension payment is considered ordinary income if taken after age 59 ½. If, however, you were born prior to 1936, you can elect to average the lump sum payment over 10 years in order to reduce the amount that is taxable each year.
Q: How are retirement pensions funded?
A: Individuals, corporations, unions, and taxpayers fund pensions. When individuals fund pensions, the money is contributed through payroll deductions. When corporations and unions fund pensions, the contribution is made from profits and dues. When taxpayers fund the pensions of public employees, a portion of the taxes they pay is set aside for use in the public pension fund.
Q: What will happen to my pension plan if the company I work for goes bankrupt?
A: Pension plans of private sector employees are protected under the Employee Retirement Income Security Act (ERISA). ERISA requires that pension assets be held in a trust separate and apart from other corporate assets. If the plan is underfunded, meaning that the obligations are larger than the assets, the Federal Pension Benefit Guaranty Corporation insures a portion of each employee's benefits.
Q: Is it possible to borrow from my pension benefits at work?
A: You can borrow up to 50% of the vested amount of your pension if your employer's plan allows for borrowing.
Q: How much value should I put in a pension if I got another job offer?
A: Compare the value of the pension to a self-funded pension like an individual retirement account or annuity. In the end, however, the best job will be the one in which you will be happiest.
Q: What is the penalty for cashing out state pension contributions?
A: If you are under age 59 ½, the distribution will be taxed at ordinary income tax rates and will also be subject to a 10% penalty.
Q: What is the difference between a pension and an annuity?
A: A pension is generally considered to be a retirement plan that is at least partially funded by an employer. An annuity is a contract between an individual and an insurance company. In exchange for the premium that is paid by the individual, the insurance company agrees to make guaranteed payments according to the terms of the contact. Because they can be used for retirement income, annuities are sometimes referred to as "personal pensions".
Q: Can I rollover a pension from a previous employer to my current employer?
A: You can rollover your pension to a new plan if the employer allows it.
Q: What happens to my pension plan if I leave my job?
A: You are always fully vested in all of the contributions you've made to your account. You are fully vested in the contributions your employer made for you after five years. When you leave your job, you will have one of three options: Leave leave the account with the old employer, rollover the account to the new employer's plan, or move the account to a rollover IRA.
Q: How much of my pension is my spouse entitled to?
A: If you and your spouse cannot agree to the amount in the case of divorce, the court will decide. In general, however, a spouse is entitled to 50% of the amount of the pension that was earned while you were married.
Q: How many years do I have to work to start receiving pension benefits?
A: If you are eligible for a public or union pension it will depend on the rules that were established for that particular pension. If you've established your own pension in the form of a retirement savings plan or annuity, you can begin taking distributions after age 59 ½.
Q: What types of pension plans exist?
A: There are two types of pensions of plans: Defineddefined-benefit and defined-contribution. With a defined-benefit plan, the employer, and sometimes the employee, makes contributions to the account, and the employee is guaranteed a set amount of income after retirement, regardless of market conditions, the performance of the investments or the longevity of the retired employee. With a defined-contribution plan, both the employee and the employer make contributions, but the amount of income the employee receives after retirement is based on the performance of the investments.
Q: Can I avoid taxes on my pension if I retire early?
A: You can avoid taxes and penalties by rolling over your pension into a qualified retirement account if you are younger than 59 ½.
Q: How do military pensions work?
A: Pension benefits for honorably discharged military personnel begin after 20 years of service. Those who started service before September 8, 1980 receive 50% of their final basic pay. Those who began their service after September 8, 1980 qualify for adjustments to the amount of the pension based on the length of service.
Q: How common is it for public employees to not get the pensions they were promised?
A: The federal government has the ability to print money and to raise taxes and states have the ability to raise taxes. Even though most public worker pension funds are underfunded, the likelihood that the federal government or a state would default on its obligations are relatively small.
Q: Do most employees in a large corporation get company pensions today?
A: Most large corporations have moved away from defined-benefit plans and instituted defined-contribution plans, like the 401(k).
Q: Which states do not tax retirement pensions?
A: The following states do not have personal income tax, and therefore do not tax retirement pensions: Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Q: Are pension payouts adjusted for inflation?
A: While some pension plans do offer inflation-adjusted payouts, most do not.
Q: Is a retirement pension taxable?
A: Yes. Distributions are fully taxable at the federal level and in states with personal income tax.
Q: Can a lender garnish pension benefits?
A: A lender can garnish pension benefits only after they are paid to you.
Q: What does becoming vested mean?
A: Being vested means that you have ownership. If you are 30% vested, you own 30% of the money your employer has contributed to your pension on your behalf. If you are fully vested, you own 100% of the money your employer has contributed.
Q: Can children of a deceased parent collect his/her pension?
A: Some pensions provide for a "survivor's benefit" for minor children. If the children are past the age of 21, chances are they will not be able to collect a parent's pension.
Q: 24) Can I put pension money into a Roth IRA?
A: A pension cannot be rolled over directly into a Roth IRA. It must first be rolled over into a traditional IRA.
Q: 25) Which jobs usually offer pensions?
A: Defined-benefit pensions are almost always provided to federal, state, and municipal employees. Most corporations, including very small businesses, offer defined-contribution plans.
While we've covered the basics of pensions here, there is much more to developing a solid retirement plan. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.