What is a qualified retirement plan?
There are two distinct elements embodied in the term “qualified retirement plan.” The main element is the term “retirement plan.” A retirement plan means any plan or program maintained by an employer or an employee organization (or both) that (1) provides retirement income to employees or (2) results in a deferral of income by employees for periods extending generally to the end of employment or beyond, regardless of how plan contributions or benefits are calculated or how benefits are distributed. [ERISA § 3 (2)] The other element is the term “qualified,” which means that the retirement plan is afforded special tax treatment for meeting a host of requirements of the Internal Revenue Code (the Code). Qualified retirement plans fall into two basic categories: defined contribution plans and defined benefit plans. A defined contribution plan provides benefits based on the amount contributed to an employee’s individual account, plus any earnings and forfeitures of other employees that are
A retirement plan is “qualified” if it meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible for the employer and earnings on such contributions are tax-deferred while they remain in the plan. The participant in a “qualified” plan is not taxed on the contributions or the earnings until they are withdrawn from the plan.
A qualified retirement plan is one that qualifies for special tax treatment under IRS Code Section 401. The contributions to a qualified plan are deductible for the employer and not taxed immediately to you. Instead, the contributions grow tax-deferred until you begin making withdrawals — usually after age 59 1/2. If you wait until you retire, you get another tax break because you will probably be in a lower tax bracket after you retire. In short, you keep more of the money you have earned and Uncle Sam gets less. Money in a nonqualified plan may also grow on a tax-deferred basis, but contributions are not deductible and thus will accumulate less cash for retirement.
