Can You Have a Pension and a 401k at the Same Time?

Saving for retirement often involves multiple income sources, and many people wonder if they can have both a pension and a 401(k). These plans serve different purposes but can complement each other to provide financial security in retirement. Understanding how they work together helps maximize benefits while avoiding pitfalls.

Eligibility for Participation in Both Plans

Access to both a pension and a 401(k) depends on the employer’s offerings. Many private-sector companies have moved away from pensions in favor of 401(k) plans, but some industries, such as utilities, manufacturing, and unionized workplaces, still provide both. Government employees, including federal, state, and municipal workers, often have pensions but may also be eligible for a 457(b) or the Thrift Savings Plan (TSP) instead of a 401(k).

Full-time employees are more likely to receive pension benefits, while part-time or contract workers may be excluded. Some employers require a vesting period, meaning employees must work a set number of years before earning full pension benefits. For example, a company with a five-year vesting schedule provides no pension benefits to employees who leave before five years but grants full benefits afterward.

Union agreements can also influence eligibility. In industries like construction or transportation, unions often negotiate pension benefits alongside 401(k) options. Military personnel have access to the Blended Retirement System (BRS), which combines a pension with a defined contribution plan similar to a 401(k).

Contribution Considerations

Balancing contributions between a pension and a 401(k) requires understanding funding sources and IRS limits. Pensions are typically employer-funded, though some require mandatory payroll deductions. A 401(k) allows employees to contribute a portion of their salary, often with employer matching contributions.

For 2024, the IRS limits employee 401(k) contributions to $23,000, with an additional $7,500 catch-up contribution for those 50 and older. Employer pension contributions do not count toward this limit, but total retirement contributions—including employer matches, profit-sharing, and employee deferrals—cannot exceed $69,000 ($76,500 for those 50 and older).

Traditional 401(k) contributions reduce taxable income in the year they are made. Pensions typically do not offer this upfront tax advantage, though some government pensions allow pre-tax contributions.

Early Withdrawal Rules

Withdrawing retirement funds before reaching the designated retirement age can result in penalties and tax consequences. Pensions and 401(k) plans have different rules governing early withdrawals.

Pensions generally do not allow early withdrawals in the same way a 401(k) does. Since they are structured as lifetime income streams, most pensions only begin distributions upon retirement or after meeting specific age and service requirements. Some offer lump-sum payouts if an employee leaves before retirement, but this often reduces overall benefits. Cashing out a pension early creates a significant tax burden, as the full amount is typically taxed as ordinary income in the year it is received.

For a 401(k), early withdrawals before age 59½ usually trigger a 10% penalty in addition to income taxes, unless an exception applies. The IRS allows penalty-free withdrawals in cases such as permanent disability, unreimbursed medical expenses exceeding 7.5% of adjusted gross income, or a qualified domestic relations order (QDRO) issued during divorce proceedings. The Rule of 55 permits individuals who leave their job at age 55 or later to withdraw from their 401(k) without penalty, though income taxes still apply.

Required Minimum Distributions

Retirement accounts are subject to mandatory withdrawals to ensure deferred taxes are eventually collected. Pensions distribute funds according to a predetermined formula, while 401(k) accounts are subject to Required Minimum Distributions (RMDs).

Under the SECURE 2.0 Act of 2022, RMDs must begin by April 1 of the year following the account holder’s 73rd birthday. The IRS calculates RMDs using life expectancy tables, and failure to withdraw the required amount results in a 25% excise tax on the shortfall, which can be reduced to 10% if corrected within two years.

For individuals still working at 73, RMDs from an employer-sponsored 401(k) can often be delayed until retirement, provided they do not own 5% or more of the company. This deferral does not apply to IRAs or former employer plans, which must follow standard RMD rules. Pensions do not allow flexible withdrawals, as payments are structured as annuities with fixed monthly amounts. Retirees must plan 401(k) withdrawals strategically to manage taxable income.

Tax Treatment

The tax treatment of pensions and 401(k) withdrawals can significantly impact retirement income. Both are generally funded with pre-tax dollars, meaning distributions are taxed as ordinary income upon withdrawal. However, the timing and structure of these withdrawals create different tax implications.

Pension payments are typically distributed as fixed monthly amounts and are fully taxable at the recipient’s marginal income tax rate. Unlike a 401(k), there is no option to adjust withdrawal amounts to manage tax liability. Some states offer tax exemptions on pension income, particularly for government or military retirees, while others tax it fully. For example, Illinois and Pennsylvania do not tax pension income, whereas California and New York do.

401(k) withdrawals provide more flexibility, allowing retirees to control the timing and amount of distributions. This flexibility can help minimize tax burdens by withdrawing only enough to stay within lower tax brackets. Additionally, Roth 401(k) accounts, which are funded with after-tax dollars, offer tax-free withdrawals in retirement, provided the account holder is at least 59½ and has held the account for at least five years. Retirees with both a pension and a 401(k) may need to plan withdrawals carefully to avoid moving into higher tax brackets, especially when RMDs begin.