Qualified Retirement Plans

Updated: Oct. 6, 2020, 11:13 a.m.

While qualified retirement plans are pretty common, most people don't understand what they mean or how to decide if they're the right choice for their savings.

Technically speaking, a qualified retirement plan is a type of retirement savings account subject to the rules laid out in the 1974 Employee Retirement Income Security Act (ERISA). These rules dictate minimum standards regarding plan participation, funding, and reporting (among other things) that plan administrators must adhere to. They're distinct from nonqualified retirement plans, which do not follow ERISA guidelines.

Read on for a closer look at some of the most common types of qualified retirement plans and their advantages and disadvantages.

Examples of qualified retirement plans

Qualified retirement plans come in many forms. Some of the most common types are:

Plan How It Works
401(k) This is one of the most common employer-sponsored retirement plans because it offers high contribution limits and employers are able to match some of their employees' contributions.
403(b) These plans are similar to 401(k)s, but they are available only to public school employees, certain ministers, and employees of tax-exempt organizations.
Thrift Savings Plan Thrift Savings Plans also resemble 401(k)s, but they're exclusively for federal government employees and members of the uniformed services, including military members, police officers, and firefighters.
Traditional IRA Anyone can open and contribute to a traditional IRA. These accounts have lower contribution limits than 401(k)s and are funded with pre-tax dollars, so contributions reduce your taxable income for the year.
Roth IRA Roth IRAs are quite similar to traditional IRAs, except they're funded with after-tax dollars, so your contributions don't reduce your taxable income this year, but you get tax-free distributions in retirement. Roth IRAs also come with a few extra restrictions based on income levels.
Pension A pension is an employer-funded retirement plan. They're pretty rare today, unless you work for the government.
Simplified Employee Pension (SEP) IRA A SEP IRA is designed for self-employed individuals, usually with no employees. It enables them to contribute money as both employee and employer so they can save more than they could with a traditional or Roth IRA.
SIMPLE IRA A SIMPLE IRA is commonly offered by small businesses with fewer than 100 employees. It has contribution limits in between 401(k) and IRA limits and mandatory matching requirements for employers.

Source: IRS

Advantages of qualified retirement plans

Qualified retirement plans offer several benefits to participants. Here are a few of the most important advantages:

Widespread availability

Some qualified retirement plans, like IRAs, are available to anyone who wishes to open them, as long as they've earned some income that they can contribute. Employer-sponsored qualified retirement plans are generally available to all full-time employees, though there may be a waiting period after you are hired before you can begin contributions.

In either case, it's easier to find and participate in qualified retirement plans than nonqualified plans, which are often designed specifically for the needs of the executives and highly compensated employees who use them.

Favorable tax treatment

Tax-deferred qualified retirement plans, like most 401(k)s and traditional IRAs, are funded with pre-tax dollars, so your contributions reduce your taxable income for the year. Roth plans are funded with after-tax dollars, so you pay taxes on your contributions, but in exchange you get tax-free distributions in retirement.

Choosing the right type of retirement plan can help you save money on taxes by paying them when your income is lower, so you lose a smaller percentage of your money back to the government.

Did you know?

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.

Icon hand with dollar sign

Employee protections

Qualified plans must follow ERISA rules, which were designed to ensure plan fiduciaries act in the best interests of plan participants and do not misuse employee funds. It also requires plan administrators to regularly provide you with information about your retirement plan to keep you in the loop.


Some qualified retirement plans, like 401(k)s, enable participants to borrow from the plan and pay back the funds with interest. It's not something all plans allow, but it can be a nice option when you're in need of cash and don't want to (or are not eligible to) take out a traditional loan.


When you leave your job, you can roll your qualified retirement plan over into a new qualified plan, either one at your new job or an IRA that you open on your own. This makes it easier to manage your retirement savings, and you can have more freedom over what you invest in if you move your funds to an IRA.

Two lit birthday candles reading 72 against black background

Source: Getty Images

Disadvantages of qualified retirement plans

Qualified retirement plans have their drawbacks, as well. Here are a few to watch:

Contribution limits

Qualified retirement plans have restrictions on how much you can contribute annually. Limits vary by plan type, your age, and your income level. High earners aren't always able to contribute up to the normal contribution limits because qualified plans are subject to discrimination tests to ensure that high-earning employees don't contribute substantially more to their accounts than lower-earning employees.

Distribution rules

You usually cannot withdraw funds from a qualified retirement plan before 59½ without paying a penalty, though there are exceptions.

Most qualified retirement plans, except Roth IRAs, are also subject to required minimum distributions (RMDs) when you turn 72, or 70½ if you reached this age before 2020. This is the government's way of ensuring it gets its portion of your savings.

Restricted investment options

Employer-sponsored qualified retirement plans often limit your investment options to a few choices preselected by your employer. IRAs offer a much broader selection of options, but there are still some things you can't invest in, like life insurance and collectibles such as art and antiques. Nonqualified retirement plans, on the other hand, don't have these restrictions, and many include life insurance policies.

Is a qualified retirement plan right for me?

Qualified retirement plans are a smart choice for most people because they offer valuable tax breaks, they're easy to take with you when you switch jobs, and they contain useful protections for participants that nonqualified plans don't.

For the average person, a qualified retirement plan will probably be the only type of plan that's available. But if you are a high-earning employee who is offered a nonqualified plan, you might be wise to take advantage of both. Start by contributing as much as you can to a qualified plan to take advantage of the tax breaks it offers, and if you max that out, you can save more in a nonqualified plan.