A private pension is a retirement plan funded by a private employer, a labor union, or an individual worker rather than by the government. It works by setting money aside during your working years so that you receive income, or a lump sum, once you retire. Private pensions come in three broad forms: defined benefit plans that promise a set monthly payment, defined contribution plans like the 401(k) where your payout depends on contributions and investment returns, and personal plans like the IRA that you open on your own.
Social Security sits outside this category. It is a federal program funded by mandatory payroll taxes, with employees and employers each paying 6.2 percent of wages up to $184,500 in 2026.1Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet Public-sector pensions for government workers, funded by tax revenue, are a separate category as well. A private pension’s health depends on the sponsoring company’s finances or, in an individual plan, your own contributions and investment choices.
Defined Benefit Plans: The Traditional Pension
A defined benefit plan promises you a specific monthly payment at retirement, calculated by a formula written into the plan. The formula typically uses your salary, age, and years of service.2U.S. Department of Labor. FAQs about Retirement Plans and ERISA – Section: What Is a Defined Benefit Plan? A common example: a plan pays 2 percent of your average salary over your last five working years for every year of service. Thirty years of service then produces a monthly annuity equal to 60 percent of your final average pay.
Your employer carries the investment risk. The company must contribute enough to cover future benefits, and the plan’s trustees manage the investments. If markets underperform, the employer covers the shortfall. You hold a legal claim to the benefit the formula produces, and the plan cannot cut benefits you have already earned.
At retirement, most defined benefit plans let you choose a lifetime monthly annuity, and some offer a single lump sum. An annuity provides steady income for life and can include a survivor benefit for your spouse. A lump sum gives you flexibility to invest or spend as you choose, but you take on the risk of outliving the money.3Pension Benefit Guaranty Corporation. Annuity or Lump Sum One boundary worth knowing: unlike most government pensions, the vast majority of private defined benefit plans do not include automatic cost-of-living adjustments, so inflation gradually erodes the purchasing power of a fixed monthly check.
Defined Contribution Plans: 401(k)s and Similar Accounts
Defined contribution plans work differently. Instead of promising a set payout, the plan sets up an individual account in your name. Your retirement benefit depends on how much goes in and how the investments perform. The most common versions are the 401(k) for employees of for-profit companies and the 403(b) for employees of nonprofits and schools.4U.S. Department of Labor. FAQs about Retirement Plans and ERISA – Section: What Is a Defined Contribution Plan? You choose how to allocate your balance among the investment options the plan offers, so you carry the investment risk. Many employers add matching contributions based on a percentage of what you put in.
2026 Contribution Limits
The IRS caps annual contributions. For 2026:5Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
- Employee elective deferrals up to $24,500 in pre-tax or Roth contributions.
- An additional $8,000 catch-up contribution if you are 50 or older, for a total of $32,500.
- A higher catch-up of $11,250 for ages 60 through 63, for a total of $35,750.
- Total annual additions (employee plus employer) of up to $72,000 across all defined contribution plans you participate in.6Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
Vesting and Rollovers
Your own contributions always belong to you. Employer contributions may be subject to a vesting schedule. Federal law allows two approaches: a cliff schedule where you become fully vested after three years, or a graded schedule where vesting rises annually from year two and reaches 100 percent by year six.7Office of the Law Revision Counsel. 29 USC 1053 – Minimum Vesting Standards If you leave before you are fully vested, you forfeit the unvested employer portion. When you change jobs, you can generally roll your balance into a new employer’s plan or into an IRA without owing tax, as long as the transfer is direct or completed within 60 days.8Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Loans From Your Account
Many 401(k) plans let you borrow from your own balance. You can take up to 50 percent of your vested balance or $50,000, whichever is less. Repayment generally must happen within five years through at least quarterly payments, with a longer term allowed if the loan buys a primary home. Miss the schedule and the outstanding balance is treated as a taxable distribution, potentially triggering the 10 percent early withdrawal penalty.9Internal Revenue Service. Retirement Topics – Plan Loans
Personal Plans You Set Up Yourself
Personal pension plans are retirement accounts you open independent of any employer. The most common is the Individual Retirement Account, which comes in two forms. A traditional IRA offers contributions that may be tax-deductible, with withdrawals taxed later. A Roth IRA uses after-tax dollars going in, and qualified withdrawals come out tax-free. You need earned income to contribute, and the account stays with you regardless of where you work.10Internal Revenue Service. Topic No. 451, Individual Retirement Arrangements (IRAs)
For 2026, you can contribute up to $7,500 to your traditional and Roth IRAs combined, or up to $8,600 if you are 50 or older.11Internal Revenue Service. Retirement Topics – IRA Contribution Limits If your earned income for the year falls below the limit, your maximum contribution equals your earned income. Your ability to deduct traditional IRA contributions, or to contribute to a Roth at all, phases out at higher incomes when you or your spouse are covered by a workplace plan. Single filers covered by a workplace plan lose the traditional IRA deduction between $81,000 and $91,000 of modified adjusted gross income. Roth IRA eligibility phases out between $153,000 and $168,000 for single filers, and between $242,000 and $252,000 for married couples filing jointly.5Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
If you are self-employed or run a small business, a Simplified Employee Pension IRA lets you contribute up to 25 percent of your net self-employment earnings, capped at $69,000 for 2026.12Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) SEP IRAs are simple to set up, carry low administrative costs, and give you control over which financial institution holds the account.13U.S. Department of Labor. SEP Retirement Plans for Small Businesses
How Private Pensions Are Taxed
Taxes on a private pension turn on whether contributions went in before or after tax. Traditional 401(k), 403(b), and traditional IRA contributions are made with pre-tax dollars, lowering your taxable income the year you contribute. In retirement, the whole distribution, contributions and growth alike, is taxed as ordinary income.14Internal Revenue Service. Topic No. 410, Pensions and Annuities Payments from a traditional defined benefit pension are also generally fully taxable, because the employer funded the plan and you never paid tax on the amounts going in.
Roth 401(k), Roth 403(b), and Roth IRA contributions use money you have already paid tax on. Qualified withdrawals, taken after age 59½ and at least five years after your first Roth contribution, come out entirely tax-free, including all investment earnings.15Internal Revenue Service. Roth Comparison Chart State income tax treatment varies. Some states exempt all retirement income; others tax it fully, sometimes with age or plan-type carveouts.
When You Can Take the Money Out
Federal rules control both the earliest age you can access the money and the latest age you can leave it alone. Withdraw from a retirement plan or IRA before age 59½ and you generally owe income tax on the distribution plus an additional 10 percent early withdrawal tax.16Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Several exceptions waive the 10 percent penalty, including total and permanent disability, distributions to beneficiaries after death, unreimbursed medical expenses above 7.5 percent of your adjusted gross income, a series of substantially equal periodic payments over your life expectancy, up to $5,000 per child for a birth or adoption, up to $10,000 for a first-time home purchase from an IRA, and up to $22,000 for economic loss from a federally declared disaster.
At the other end, you cannot leave money in a traditional retirement account forever. Starting at age 73, you must take required minimum distributions each year from traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and other defined contribution plans.17Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) Your first RMD is due by April 1 of the year after you turn 73, and each later year’s is due by December 31. If you are still working and participate in your employer’s plan, some plans let you delay RMDs until retirement. Under the SECURE 2.0 Act, the RMD starting age rises to 75 in 2033. Roth IRAs are not subject to RMDs during the owner’s lifetime.
Legal Protections That Back Your Plan
Private pensions are governed by the Employee Retirement Income Security Act of 1974, or ERISA. The law sets minimum standards for participation, vesting, benefit accrual, and funding. Generally, a plan cannot require you to be older than 21 or to have worked more than one year before you become eligible to participate, though plans offering immediate full vesting may extend the wait to two years.18Office of the Law Revision Counsel. 26 USC 410 – Minimum Participation Standards
Anyone managing plan assets or making investment decisions is a fiduciary. ERISA requires fiduciaries to act solely in the interest of participants and beneficiaries, apply the care a prudent person would use, diversify investments to reduce the risk of large losses, and follow the plan’s governing documents.19Office of the Law Revision Counsel. 29 USC 1104 – Fiduciary Duties Breaches can lead to personal liability, lawsuits from participants, and Department of Labor penalties. Plan administrators must also give you clear written information about how the plan works, what benefits you have earned, and how the plan is funded. The Summary Plan Description is the core disclosure document.
If you are married and participate in a defined benefit plan, federal law requires the plan to pay your benefit as a joint and survivor annuity unless you and your spouse both waive it in writing. Your spouse’s consent must acknowledge the effect of the waiver and be witnessed by a plan representative or notary.20Office of the Law Revision Counsel. 29 USC 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity The same rule applies before you can use an account balance as loan collateral.
For defined benefit plans, there is one more layer. The Pension Benefit Guaranty Corporation is a federal agency that insures private-sector defined benefit plans. If your employer’s plan runs out of money and the company is in financial distress, the PBGC steps in as trustee and pays basic benefits up to legal limits.21Pension Benefit Guaranty Corporation. Understanding Your Pension and PBGC Coverage For plans terminating in 2026, the maximum guaranteed monthly benefit for a 65-year-old retiree is $7,789.77 as a straight-life annuity, or $7,010.79 as a joint and 50 percent survivor annuity.22Pension Benefit Guaranty Corporation. Maximum Monthly Guarantee Tables Retiring before 65 or choosing a different payment form lowers the guaranteed amount. The PBGC does not cover defined contribution plans like 401(k)s; those depend entirely on the balance in your individual account.