A qualified retirement plan is a retirement plan recognized by the IRS where investment income accumulates tax-deferred. Common examples include individual retirement accounts (IRAs), pension plans and Keogh plans. Most retirement plans offered through your job are qualified plans.
A qualified retirement plan meets the requirements of Internal Revenue Code Section 401(a) of the Internal Revenue Service (IRS) and is therefore eligible to receive certain tax benefits, unlike a non-qualified plan. An employer establishes such a retirement plan on behalf of and for the benefit of the company’s employees. It is one tool that can help employers attract and retain good employees.
Understanding Qualified Retirement Plans
Qualified plans come in two main types: defined benefit and defined contribution, though there are also some other plans that are hybrids of the two, the most common of which is called a cash balance plan. Defined benefit plans give employees a guaranteed payout and place the risk on the employer to save and invest properly to meet plan liabilities. A traditional annuity-type pension is an example of a defined-benefit plan.
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Qualified retirement plan example
If you work for a company that offers a qualified retirement plan, especially a defined-contribution plan, you’ll likely get to choose a certain percentage of your income to contribute to the plan.
For instance, if your employer offers a 401(k) plan, you can decide how much of your income you want to contribute to that 401(k). Contributions are tax-free, and are made during each pay period.
In addition, many employers also match employee contributions up to a certain percentage. If your employer matches 3 percent of your contributions, it is in your best interest to contribute at least that much to take advantage of the full employer contribution.
Looking for more retirement plan information? Find the advice you need to make sure you save enough for retirement.
Other examples of qualified plans include the following:
- Profit-sharing plans
- 403(b) plans
- Money purchase plans
- Defined benefit plans
- Employee stock ownership (ESOP) plans
- Salary Reduction Simplified Employee Pension (SARSEP)
- Simplified Employee Pension (SEP)
- Savings Incentive Match Plan for Employees (SIMPLE)
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