A pension plan is an organized investment program designed to provide income during older age or retirement years. Pension plans may be individually arranged or come through an employer. Because most qualified programs and plans offer a form of social insurance, the federal government treats them favorably, with deferred taxation and portability benefits.
- Tax Treatment: Pension fund contributions from both individuals and contributing employers are tax deductible. Fund earnings on the invested contributions are tax deductible. Benefits are not taxed until they are actually paid out—during retirement years when retirees would presumably be in a lower tax bracket. It is this treatment that provides the incentive for most persons to invest in pension plans rather than savings accounts or other investments, which are taxed when the interest is earned or the investment growth is “realized.”
- Portabililty: Formal pension plan administrators may invest pension funds in various portfolio schemes and may move funds around to maximize investment return. Likewise, individuals may “roll-over” funds from one account to another, without invoking a tax penalty (in most cases) and without losing the funds’ distinction as constituting part of a “pension plan.”