A pension is a retirement plan that pays the employee a lifetime benefit determined by a combination of the length of service and salary while a retirement account is a plan that contains a specific dollar value.Pension-Retirement-Accounts-DPLIC-300x200

Pensions are usually found only with a large company or with a government employer while a retirement account, which include IRA’s, SEP’s, 401(k)’s, profit sharing plans, and deferred compensation plans, can be private or with an employer of any size.

The amount in a retirement account determines how much you will receive. Once you have used up the fund, you will no longer receive any payment. Any money left in your account upon your death can be left directly to a named beneficiary or paid to your estate.

On the other hand, a pension pays a future benefit based upon your time of service and final average salary. As a result, its value cannot be compared to the value of a retirement account unless you determine its “present” value. This value, which is usually done by an actuary, will be a dollar amount that represents what the pension would be worth if it was a fixed dollar amount in a retirement account. The amount you have contributed to a pension is not the present-day value.

Girl hand calculate

Instead of obtaining a “present-day value,” you can also elect to divide a pension by paying the non-employee spouse a portion of the retirement benefit the employee spouse receives when he or she retires. This is done using a formula that pays the non-employee a fraction of the benefit the employee receives based upon the length of time you were married while a member of the pension.

Finally, you should know that, except for a Roth IRA, you will be taxed when you receive the money. However, you can transfer an interest in either type of account to your spouse without penalty or taxes (until distribution) by using a court order called a Qualified Domestic Relations Order (QDRO).