As retirement approaches, many people are faced with a key question: which retirement plan should they choose to ensure a stable, worry-free financial future?
There are two main options: pension plans (defined-benefit retirement plans) and Individual Retirement Accounts (IRAs). These two solutions are among the most widespread retirement plans in the United States, but they have very distinct characteristics, advantages and disadvantages.
Understanding their differences is crucial to optimizing your retirement planning.
Pension plans: security but little control
Pension plans, or defined-benefit plans, are offered and financed largely by the employer.
They guarantee a monthly income for life, based on a formula that takes into account years of service, retirement age and average salary. It’s a promise of stability.
Benefits
- Guaranteed income for life: A valuable advantage in an uncertain financial world.
- Employer responsibility: The company assumes responsibility for investment management.
- Partial protection in the event of bankruptcy: Thanks to the Pension Benefit Guaranty Corporation (PBGC), certain guarantees are available.
Limitations
- Lack of portability: If you change employers, your rights may be restricted if you are not yet “vested”.
- Little flexibility: No choice of investments and withdrawal options are often limited to a monthly payment.
- Solvency risk: Even with federal guarantees, some pensions may be weakened if the company runs into difficulties.
IRAs: Freedom, tax advantages and individual responsibility
Individual Retirement Accounts (IRAs) are retirement accounts that you open yourself, independently of your employer.
There are two main types: The Traditional IRA, with tax-deductible contributions and taxation at the time of withdrawal, and the Roth IRA, where withdrawals are tax-free provided certain rules are met.
Benefits
- Total control over investments: Stocks, Bonds, ETFs, Real Estate… You choose.
- Flexible taxation: You can withdraw your Roth contributions without penalty, and there are no Required Minimum Distributions (RMDs) during your lifetime.
- High portability: You keep your account whatever your professional situation.
Limits
- Low contribution limits: $8,000 per year after age 50 in 2025.
- No guaranteed income: Performance depends on the market and your decisions.
- More complex management: You are responsible for your investment strategy.
Social Security: a pillar, but insufficient on its own
Social Security provides an income base for retirement, but it’s not enough to maintain the standard of living of the majority of retirees.
That’s why it needs to be supplemented by a retirement plan, such as a pension or an IRA. In addition, depending on your other sources of income, part of your benefits may be taxed.
Pension Plan vs IRA: A structured comparison
To make the right choice between a pension plan and an Individual Retirement Account (IRA), it’s essential to analyze several key dimensions: financing, income guarantee, investment choices, taxation, portability and accessibility.
Financing
Most pension plans are financed by the employer. In some cases, employees may also contribute, but the bulk of the responsibility lies with the company.
IRAs, on the other hand, are retirement accounts funded exclusively by the individual. This means that savings are based entirely on personal initiative, with no employer involvement.
Guaranteed income
A major advantage of pensions is the guaranteed monthly income for life. This amount is defined according to a formula integrating salary and years of service.
In contrast, IRAs do not guarantee any income. The sums available at retirement depend on the amounts paid in and the performance of the investments made in the account.
Investment choices
With a pension plan, investment decisions are made by the employer or a designated fund manager. The employee has no control over the allocation strategy.
Conversely, IRA holders have total freedom of choice. They can invest in equities, bonds, index funds, Real Estate, etc., according to their risk profile and retirement objectives.
Taxation
From a tax point of view, pensions are generally taxed as ordinary income at the time of withdrawal.
IRAs, on the other hand, offer two tax regimes. The Traditional, with deduction of contributions on entry and taxation on exit, and the Roth, with no initial deduction but totally tax-free withdrawals on retirement (subject to conditions).
This flexibility allows you to adapt your tax strategy to your current and future situation.
Portability
Another important criterion is portability. Pension plans are often tied to the employer. So, leaving the company before reaching the vesting period can limit or even cancel your pension rights.
In contrast, an IRA is portable. It follows you throughout your career, whatever your employer or professional status.
Accessibility
Finally, accessibility differs from plan to plan. Pensions depend on the existence of a group plan set up by your employer, which is no longer as common today, especially in the private sector.
IRAs, on the other hand, are open to all, subject to certain income and contribution limits. This makes them more inclusive, especially for the self-employed, SME employees or people undergoing retraining.
Toward a combined strategy?
Ideally, combining the two types of retirement plans offers a judicious balance.
A pension plan guarantees a stable income base, while an IRA, particularly a Roth IRA, allows you to supplement your retirement with flexible and potentially tax-free withdrawals.
This diversification can also enable finer-tuned tax management during retirement.
Choose according to your profile
There is no one-size-fits-all solution. If you work in the public sector or in a large company offering a generous pension, you may prefer the security of a guaranteed income.
If you’re more mobile, an entrepreneur, or want to control your investments, the Individual Retirement Account (IRA) is a flexible and effective alternative.
In all cases, understanding your options is the first step toward a successful retirement.
IRAs FAQs
An IRA (Individual Retirement Account) allows you to make tax-deferred investments to save money and provide financial security when you retire. There are different types of IRAs, the most common being a traditional one – in which contributions may be tax-deductible – and a Roth IRA, a personal savings plan where contributions are not tax deductible but earnings and withdrawals may be tax-free. When you add money to your IRA, this can be invested in a wide range of financial products, usually a portfolio based on bonds, stocks and mutual funds.
Yes. For conventional IRAs, one can get exposure to Gold by investing in Gold-focused securities, such as ETFs. In the case of a self-directed IRA (SDIRA), which offers the possibility of investing in alternative assets, Gold and precious metals are available. In such cases, the investment is based on holding physical Gold (or any other precious metals like Silver, Platinum or Palladium). When investing in a Gold IRA, you don’t keep the physical metal, but a custodian entity does.
They are different products, both designed to help individuals save for retirement. The 401(k) is sponsored by employers and is built by deducting contributions directly from the paycheck, which are usually matched by the employer. Decisions on investment are very limited. An IRA, meanwhile, is a plan that an individual opens with a financial institution and offers more investment options. Both systems are quite similar in terms of taxation as contributions are either made pre-tax or are tax-deductible. You don’t have to choose one or the other: even if you have a 401(k) plan, you may be able to put extra money aside in an IRA
The US Internal Revenue Service (IRS) doesn’t specifically give any requirements regarding minimum contributions to start and deposit in an IRA (it does, however, for conversions and withdrawals). Still, some brokers may require a minimum amount depending on the funds you would like to invest in. On the other hand, the IRS establishes a maximum amount that an individual can contribute to their IRA each year.
Investment volatility is an inherent risk to any portfolio, including an IRA. The more traditional IRAs – based on a portfolio made of stocks, bonds, or mutual funds – is subject to market fluctuations and can lead to potential losses over time. Having said that, IRAs are long-term investments (even over decades), and markets tend to rise beyond short-term corrections. Still, every investor should consider their risk tolerance and choose a portfolio that suits it. Stocks tend to be more volatile than bonds, and assets available in certain self-directed IRAs, such as precious metals or cryptocurrencies, can face extremely high volatility. Diversifying your IRA investments across asset classes, sectors and geographic regions is one way to protect it against market fluctuations that could threaten its health.