What Is a Pension-Related Deduction?

Pension-Related Deduction
What Is a Pension-Related Deduction?

55% of Americans say they’re behind on retirement savings; are you? If you’ve been living paycheck-to-paycheck, then you may not have had the luxury of thinking about future pension benefits.

Yet, everyone retires at some point, and you want to be ready for this, whether it’s five or 50 years away. Otherwise, you’ll have a challenging time in your golden years. So start learning now.

Below, we’ll discuss what a pension-related deduction is. We’ll also tell you what else you need to know about the subject and give examples.

What Is a Pension-Related Deduction?

A pension-related deduction (or PRD) typically refers to an amount deducted from an employee’s salary or income to contribute towards their pension plan. Pensions are retirement plans offered by employers to provide income to their workers after they stop employment.

Employees often contribute a portion of their salary towards their pension plan, and sometimes, their employees do so on their behalf too. These contributions are deducted from the gross income before taxes are calculated. As a result, there may be tax advantages for workers.

Examples of Pension-Related Deductions

Now that you know what a PRD is, you’re probably curious about real-life examples. That way, you know what your options are.

Below are some common PRDs, besides employee and employer contributions.

Tax Deferral

In some cases, contributions to certain types of pension plans (such as traditional 401(k) plans) are tax-deferred. This means that contributions are deducted from your income before taxes are applied, so it reduces your current tax liability. Taxes are only paid when you withdraw from your pension during retirement.

Those who are business owners can still benefit from something similar to a 401(k). For instance, they can get a simplified employee pension plan, or SEP IRA. Learn more about what is a SEP IRA to see if it’s right for you.

Catch-Up Contributions

Some pension plans allow employees who are older or nearing retirement age to make additional contributions beyond the standard limits. These catch-up contributions can also be deducted from the employee’s income before taxes.

Voluntary Contributions

Employees may have the option to make additional voluntary contributions to their pension plans beyond the required or employer-matched ones. Like the others on this list, these voluntary contributions can be deducted before taxes.

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Defined Benefit Plan Contributions

In a defined benefit pension plan, contributions are made based on a formula that considers factors such as salary history and years of service. The contributions required from both employees and employers are determined by the plan’s rules and actuarial calculations.

Know Your Facts on Pensions

Being comfortable after retirement is crucial, and you deserve it. After working so hard for decades, you should be able to kick back and relax without financial worries.

Now that you know what a pension-related deduction is, you can make better decisions for the future. And as a result, life won’t be difficult once you’re done working.

Want to take control of your finances and other business-related subjects? Then keep browsing our blog page now.

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