Pension Taxes, The Defined Benefits Plan, and DC

Pension taxes on defined benefits plan payouts are less complicated than for defined contribution plans (DC). Tips on DC tax issues follow.

Pension Taxes

Funds in qualified plans--employer-sponsored programs and individual retirement arrangements (IRAs)--accumulate tax-deferred.

A key part of distribution practice is to maintain tax-deferred status of funds as long as possible in order to minimize pension taxes.

Roth IRA programs allow an alternative approach to pension taxes. Post-tax dollars are saved and investment income is tax-free.

Role of the Defined Benefits Plan and the Defined Contribution Plan (DC)

Pension plans were originally established as income replacement so workers could retire orderly. In the past, the defined benefits plan dominated the pension scene. But today, its primacy defers to the DC.

Traditionally, DC plans pay benefits as lump sums. But in many cases, other options are available, such as installment payouts, life annuities, or keeping the money in the plan. Lump sums are often rolled over into a tax-protected account.