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A qualified retirement plan can help you save money on taxes by paying them later in life, when people often have a lower income and tax rate.
What's the difference between a qualified and a non-qualified retirement plan?
How do I know if my retirement plan is qualified?
What is an advantage of a qualified plan for retirement benefits?
What is not a qualified retirement plan?
A qualified retirement plan is a specific type of retirement plan that confers tax advantages to employers and employees. Qualified retirement plans must meet criteria set forth by the Internal Revenue Code and the requirements established by the Employee Retirement Income Security Act (ERISA).
A retirement plan must meet many requirements to be considered a qualified plan. Most of those requirements must be fulfilled by employers rather than employees. What's important to workers is that contributions to qualified plans come with tax benefits that make saving for retirement easier.
To be considered qualified, a retirement plan must:
The IRS maintains a full list of common requirements for qualified plans. Again, most employees cannot control whether their employers meet these mandates. Employees can receive the tax benefits of participating in a qualified plan simply by signing up for and contributing to a plan offered by their employer.
A qualified plan confers tax advantages for both employers and employees.
Employers can make tax-deductible contributions. Any contributions that they make on behalf of workers are not subject to payroll taxes. Small businesses that establish qualified retirement plans may be eligible for tax credits to help defray start-up costs.
Employees can elect to contribute to qualified plans on a pretax basis via withholdings from their salaries. Money invested in a qualified plan can grow tax-free.
Plan administrators are allowed, though not obligated, to issue loans to employees who contribute to qualified plans. These loans enable employees to borrow cash from their own retirement funds. Early withdrawals (those made before the plan beneficiary reaches age 59 1/2) from qualified plans are typically subject to tax penalties, with some narrow exceptions.
It's important to note that there are other types of retirement plans that offer tax benefits similar to those of qualified plans, such as traditional and Roth IRAs (individual retirement accounts). Because these plans are used by individuals to save for retirement rather than established by employers in accordance with IRS and ERISA rules, they are not considered qualified.
However, traditional IRAs and Roth IRAs do come with tax advantages, including tax-free growth and other favorable tax treatments. Contributions to traditional IRAs are tax-deductible, and withdrawals from Roth IRAs are tax-free.
Qualified retirement plans can be broadly divided into two categories:
Common examples of qualified retirement plans include, but are not limited to:
For these or other accounts to be considered qualified, they must comply with ERISA requirements as well as the IRS mandates set forth in Section 401(a) of the Internal Revenue Code. For example, while most 401(k) plans are qualified, a particular plan might not be if the employer does not keep its plan documents updated to reflect changes to the law or does not correctly apply the plan's definition of compensation for employee deferrals.
Self-employed individuals may also establish qualified plans. These retirement plans are usually referred to as Keogh plans or H.R. 10 plans. Because establishing a qualified plan can be complicated, it's more common for businesses with employees to establish them than for self-employed individuals to use them.
Employers may also set up non-qualified retirement plans, such as executive bonus plans. These do not provide the same tax benefits as qualified plans. Employees are required to include contributions to non-qualified plans in their gross incomes for tax purposes.
Most employer-sponsored retirement plans are qualified retirement plans. Chances are good that your plan is qualified if it was set up by your employer, especially if you aren't a highly compensated employee or a leader at your organization and if you don't work for the government or a religious organization.
The easiest way to find out if you have a qualified retirement plan is to talk with your plan administrator or another member of your organization who set up the plan. In most cases, an employer's contributions to your qualified plan will be listed by your employer in Box 12 of your W-2 form.
