Pensions 101: Understanding 401(k)s, Roth IRAs, and How to Plan for Retirement in the U.S.

The best time to start planning for retirement was yesterday. The second-best time is today.

Introduction

Whether you’re 25 or 55, retirement can feel like something far off — or even a little confusing. What’s a 401(k)? Should you have a Roth IRA? Are pensions still a thing? And if you haven’t started saving yet, are you already behind?

This article is your beginner-friendly guide to how pensions and retirement plans work in the U.S. We’ll explain the key options available, who they’re for, and how to start (or catch up) no matter your age.

What Is a Pension?

A pension is a retirement plan where your employer promises to pay you a set amount of income after you retire. It’s usually based on your salary and years of service.

These are known as defined benefit plans, because the benefit (your retirement income) is defined in advance. You may have heard of them in the context of government workers, teachers, or large corporations.

But here’s the reality: traditional pensions are becoming rare in the private sector. Most people today save for retirement through defined contribution plans — where you put money in, often with some help from your employer, and your retirement income depends on how the investments perform.

The 401(k): America’s Workplace Retirement Plan

A 401(k) is a retirement account offered by employers. You contribute a portion of your paycheck, and in many cases, your employer will match part of your contributions.

Key Features:

• Pre-tax contributions: Money goes in before taxes, reducing your taxable income now
• Tax-deferred growth: Investments grow without being taxed until you withdraw them
• Annual limit (2024): Up to $23,000 if you’re under 50; $30,500 if you’re 50 or older
• Employer match: Many companies match 3–6% of your salary if you contribute

Pro tip: If your employer offers a match, always contribute enough to get the full match. It’s free money.

Roth IRA: The Tax-Free Growth Option

A Roth IRA is an individual retirement account you open yourself (not through an employer). It’s different from a 401(k) in one key way: the tax treatment.

Roth IRA Benefits:

• After-tax contributions: You pay tax on the money now, but…
• Tax-free growth: Your investments grow without tax
• Tax-free withdrawals in retirement: If you follow the rules, you’ll never pay tax again on that money
• Flexibility: You can withdraw your contributions at any time without penalty

Annual limit (2024): $6,500 if you’re under 50; $7,500 if you’re 50 or older
Income limit: You must earn below ~$153,000 (single) or ~$228,000 (married filing jointly) to contribute

Wait — I Don’t Have a Roth. Am I Missing Out?

If you don’t have a Roth IRA, don’t panic — but yes, you might be missing out on one of the best tools for long-term wealth building. Here’s why:

• Tax-free growth is powerful, especially over decades
• You’ll likely be in a higher tax bracket later (especially if you’re young now)
• Roth IRAs give you flexibility — and fewer tax surprises in retirement

Good news: You can open a Roth IRA anytime through platforms like Fidelity, Schwab, or Vanguard, as long as you have earned income and are within the income limits.

Other Retirement Accounts You Might Hear About

• Traditional IRA: Like a 401(k), but opened independently. Contributions may be tax-deductible depending on income.
• 403(b): Similar to a 401(k) but for nonprofit or public sector workers
• SEP IRA / Solo 401(k): For self-employed people and freelancers

What If You’re Starting Late?

Don’t worry — you’re not alone, and it’s never too late to start.

• Focus on maximizing your contributions now
• Take advantage of catch-up contributions (extra amounts allowed after age 50)
• Use a combination of tax-deferred and tax-free accounts to balance your strategy
• Consider delaying Social Security to increase monthly payments later

Next Steps: What Should You Do Today?

1. Check if your employer offers a 401(k), and contribute enough to get the match
2. Open a Roth IRA if eligible and start small — even $25/month is a win
3. Get familiar with your investment options (target-date funds are a good simple choice)
4. Automate your contributions so it happens without thinking
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6. Remember: consistency beats complexity

Conclusion

Understanding pensions, 401(k)s, and Roth IRAs is the first step in taking control of your financial future. Whether you’re early in your career or getting a late start, it’s never too late to build toward a retirement that’s less about worry — and more about freedom.

Next up, we can explore how to decide between Roth and traditional accounts, how to choose investments inside your 401(k), or how to catch up if you feel behind.