allworth-financial-logo-color
    • Wealth Management
      • Financial Planning
      • Investment Management
      • Tax Planning
      • Estate Planning
      • Insurance Services
    • 401(k) For Employers
    • For Airline Employees
    • Our Approach
    • Why People Work With Us
    • Office Locations
    • FAQs
    • Our Fees
    • Our Story
    • Advisors
    • Our Leadership
    • Advisory Firm Partnerships
    • Allworth Kids
    • Webinars & Events
    • Podcasts
    • Financial Planning
    • Investment Management
    • Tax Planning
Meet With Us
  • Locations
  • Login
  • Contact

4 Essential Facts about 401(k)s, IRAs and Pensions

  • Share this post

Your retirement income has to come from someplace, right?

An informal poll of our advisors revealed that a lot of clients aren’t entirely comfortable with the inner workings of common retirement vehicles like IRAs, 401(k)s, or pensions.

It’s my belief that the more you know about how these entities function, the easier it is to know what questions to ask, how to stay on course, and, not only how to meet your savings and investment goals, but how to make your money last.

With that, here are the basics of 3 common retirement accounts.

THE 401K

With 94 million participants, the 401(k) is easily the most popular retirement savings vehicle in America.[1]

But how did the 401(k) evolve?

Conceived in 1980 by benefits consultant Ted Benna (who we recently interviewed on Money Matters), participating in a 401(k) means pre-tax money gets deducted from your paycheck and put away for your retirement.

The money gets invested for you by your employer (though you get to select the risk level of those investments).

Later (usually after you retire), you pay taxes on the distributions as the money is withdrawn.

Quick 401(k) Facts

  • The contribution limit for 2017 is $18,000
  • If you are over 50, you can also use the “catch up” contribution, which is $6,000
  • Most people don’t realize that management fees are being deducted from their balances
  • The key ages for 401(k) plans are:
    • 55: When most plans begin offering retirees penalty-free withdrawals
    • 59½: When some plans offer withdrawals, even if you’re still working
    • 70½: When you typically have to begin taking minimum distributions

An interesting 401(k) fact: It wasn’t invented by the government to benefit taxpayers. Ted Benna literally created it from a tax loophole, and even then it still took years to become law.

That’s right. The IRS didn’t like it. In fact, they twice (in the late 80s) posed legal challenges to invalidate 401(k) plans. The reason? They were concerned that too many Americans were putting money away and that the government was going to be underfunded.

THE Traditional IRA

IRA stands for Individual Retirement Account. There are several types (Roth, SEP, Simple), but let’s discuss the Traditional IRA.

One of the biggest misperceptions about an IRA is that it’s an actual investment. It’s not. It’s a collection (stocks, bonds, mutual funds, etc.) of investments. IRAs are especially popular for people who are self employed, and for those people who work for companies that don’t offer a 401(k).

(Even if you have a 401(k), you can still fund an IRA, but there are income limitations.)

Quick Traditional IRA Facts:

  • 2017 contribution limits are $5,500 (with a $1,000 catch up contribution)
  • You must be under 70½ and still earning income to participate
  • Similar to a 401(k), the money isn’t taxed until it’s withdrawn during retirement
  • If you take money out before you reach 59½, you’ll usually incur a 10% penalty

The two most common IRAs are Traditional and Roth. The most obvious difference between the two is that Roth IRAs are funded with “after tax” income, which means that when you retire and take distributions from your Roth IRA, the money (and even the growth) is exempt from taxes.

Choosing which type of IRA is right for you is a complex process that’s contingent upon your employment status, income, tax bracket, when you’ll need the money, and more. Have your advisor review which options are best for your unique situation.

THE Traditional Pension

A pension is a defined benefit plan where, based on things like your salary level and plan contributions, your employer guarantees you a certain amount of income once you retire.

What’s the status of modern pension offerings?

Private sector companies continue to drop pensions at a fast clip. Once the most common retirement vehicle, now, just under 20% of Fortune 500 companies (down from 60% only 20 years ago), still offer pensions to their new hires.[2]

Somewhat surprisingly, just 4% of non-Fortune 500 private sector companies still offer their new hires pensions.[3]

So, who still offers them? The government. Most public sector jobs, that is, local, state and federal government entities (along with some utility and energy companies), still offer their employees full pensions.

Quick Traditional Pension Facts:

  • Pensions typically give retirees a choice between a lump sum payout or lifetime monthly payments
  • People who earn government pensions often receive no Social Security
  • Pension amounts are usually calculated by a set formula rather than investment returns
  • Pensioners are protected from swings in the stock market (There’s no investment risk.)

Here’s a pension fact I love: The invention of the pension is often credited to German Chancellor Otto von Bismarck, who created the Old Age and Disability Insurance Bill for Prussians back in 1889.

Conclusion

Retirement isn’t free. Whether you participate in a defined contribution plan (401(k)), or you contribute to a defined benefit plan (pension) and elect to receive a lump sum when you retire, your savings have to earn money if they’re going to last. Got questions: Contact us today.


[1] American Benefits Council June 2017
[2] Business Insurance February 22nd, 2016
[3] CNN Money http://money.cnn.com/retirement/guide/pensions_basics.moneymag/index7.htm June 29, 2017

Give yourself an advantage. Sign up to receive monthly insights from our Chief Investment Officer, and be the first to know about upcoming educational webinars. You'll also get instant access to our retirement planning checklist.

Related Articles
See more articles
November 01, 2024 Should you be using a Donor-Advised Fund for charitable giving?

Learn more about a charitable giving strategy for high-net-worth investors that offers flexibility and significant tax benefits.

Read Now
September 24, 2024 Alternative investments: The need-to-knows

Are alternative investments right for your portfolio? Allworth Partner Advisor Victoria Bogner, CFP®, CFA, AIF®, helps you answer the question.

Read Now
May 23, 2024 How underspending (yes, underspending) can ruin retirement

Allworth co-founder Scott Hanson tackles a problem that you wouldn’t think would be an issue: Not spending enough money in retirement.

Read Now
Allworth Financial logo
Talk with an Advisor Contact us
  • Services
    • Wealth Management
    • 401(k) For Employers
    • For Airline Employees
  • Working With Us
    • Why People Work With Us
    • Office Locations
    • FAQs
    • Our Fees
    • Client Login
  • About Us
    • Advisors
    • Our Leadership
    • Advisory Firm Partnerships
    • Allworth Kids
    • Careers
    • Form CRS
  • Insights
    • Workshops & Events
    • Podcasts
    • Financial Planning
    • Investment Management
    • Tax Planning

Newsletter

Subscribe to receive monthly insights from our Chief Investment Officer, and be the first to know about upcoming educational webinars.

©1993-2025 Allworth Financial. All rights reserved.
  • Privacy Policy
  • Disclosures
  • Cookie Preferences
  • Do Not Sell or Share My Personal Information

Advisory services offered through Allworth Financial, a Registered Investment Advisor

Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Check the background of this firm on FINRA's BrokerCheck.

HMRN Insurance Agency, LLC license #0D34087

Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Allworth is engaged, or continues to be engaged, to provide investment advisory services.  Rankings should not be considered an endorsement of the advisor by any client nor are they representative of any one client’s evaluation or experience. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized advisor.  Therefore, those who did not submit an application for consideration were excluded and may be equally qualified.

1.  Barron’s Top 100 RIA Firms: Barron’s ranking of independent advisory companies is based on assets managed by the firms, technology spending, staff diversity, succession planning and other metrics. Firms who wish to be ranked fill out a comprehensive survey about their practice. Allworth did not pay a fee to be considered for the ranking.  Allworth has received the following rankings in Barron’s Top 100 RIA Firms: #14 in 2024, #20 in 2023 and #31 in 2022. #23 in 2021, #27 in 2020.

2.  Retention Rate Source: Allworth Internal Data, FY 2022

3 & 9.  NBRI Circle of Excellence and Best in Class Ethics:  National Business Research Institute, Inc. (NBRI) is an independent research firm hired by Allworth to survey our customers. The survey contains eighteen (18) scaled and benchmarked questions covering a total of seven (7) topics, and a range of additional scaled, multiple choice, multiple select and open-ended question and is deployed biannually. NBRI compares responses across its company universe by industry and ranks the participating companies in each topic. The Circle of Excellence level is bestowed upon clients receiving a total company score at or above the 75th percentile of the NBRI ClearPath Benchmarking database.  Allworth’s 2023 results were compiled from 1,470 completed surveys, with results in the 92nd percentile. Allworth pays NBRI a fee to conduct the survey.

4.  As of 1/1/2025, Allworth Financial, an SEC registered investment adviser and AW Securities, a registered broker/dealer have approximately $26 billion in total assets under management and administration.

5.  Investment News Best Places to Work for Financial Advisors:  Investment News ranking of Best Places to Work for Financial Advisors is based on being a United States based Registered Investment Adviser with a minimum of 15 full or part-time employees working in the United States and having been in business for over a year.  Firms who meet Investment News’ criteria fill out an in-depth questionnaire and employees were asked to take part in a companywide survey.  Results of the questionnaire and employee surveys were analyzed by Investment News to determine recipients.  Allworth Financial did not pay a fee to be considered for the ranking.  Allworth Financial has received the ranking in 2020 and 2021.

6.  2021 Value of an Advisor Study / Russel Investments

7.  RIA Channel Top 50 Wealth Managers by Growth in Assets:  RIA Channel’s ranking of the Top 50 Wealth Managers by Growth in Assets is based on being an active Registered Investment Adviser with the Securities and Exchange Commission with no regulatory, criminal or administrative violations at the time of the ranking, provide wealth management services as their primary business and have a two year growth rate of 30% based on assets reported on Form ADV Part 1 at the time of ranking.  Allworth Financial did not pay a fee to be considered for the ranking.  Allworth Financial received the ranking in 2022.

8.  USA Today Best Financial Advisory Firms: USA Today’s ranking of Best Financial Advisory Firms was compiled from recommendations collected through an independent survey and a firm’s short and long-term AUM growth obtained from public sources. Allworth Financial did not participate in the survey, as self-recommendations are prohibited from consideration, and all surveyed individuals were selected at random. Allworth Financial did not pay a fee to be considered for the ranking. Allworth Financial received the ranking in 2024.

Tax services are provided by Allworth Tax Solutions, an affiliate of Allworth Financial. Allworth Financial does not provide tax preparation services or advice.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Important Information

The information presented is for educational purposes only and is not intended to be a comprehensive analysis of the topics discussed. It should not be interpreted as personalized investment advice or relied upon as such.

Allworth Financial, LP (“Allworth”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of the information presented. While efforts are made to ensure the information’s accuracy, it is subject to change without notice. Allworth conducts a reasonable inquiry to determine that information provided by third party sources is reasonable, but cannot guarantee its accuracy or completeness. Opinions expressed are also subject to change without notice and should not be construed as investment advice.

The information is not intended to convey any implicit or explicit guarantee or sense of assurance that, if followed, any investment strategies referenced will produce a positive or desired outcome. All investments involve risk, including the potential loss of principal. There can be no assurance that any investment strategy or decision will achieve its intended objectives or result in a positive return. It is important to carefully consider your investment goals, risk tolerance, and seek professional advice before making any investment decisions.