A qualified retirement plan is simply a plan that meets the requirements set out in Section 401(a) of the U.S. tax code. This does not mean that other types of plans are not available to build your nest egg. Still, the majority of retirement savings programs offered by employers are qualified plans since contributions are tax-deductible. There are several types of qualified plans, though some are more common than others.

Defined Contribution Plans

The most common type is the 澳洲幸运5开奖号码历史查询:defined contribution plan, which means that the employer and/or employee contribute a set amount to the employee's individual account and the total account balance depends on the amount of those contributions and the rate at which the account accrues interest.

Examples of defined contribution plans include a 401(k) or a 403(b) if the company is a nonprofit. For the most part, these plans are tax-deferred, meaning contributions are made with pretax dollars, and the employee pays income taxes on funds in the year in which they are withdrawn. Also, the earnings in these plans grow tax-free.

Unlike other kinds of retirement plans, a 401(k) allows the employee the ability to borrow a percentage of their funds in the plan. However, early withdrawals before the age of 59½ will incur a 10% penalty from the Internal Revenue Service (IRS) in addition to income taxes on the distribution.

Employer Match

In a defined contribution plan, employees contribute a percentage of their compensation each year, and employers have the flexibility to choose the kind of contribution they make.

In other words, the employer may not be required to contribute at all, in which case, the accrual of funds depends on how much the employee chooses to contribute and how much that money is earned. However, in many plans, employers contribute a set amount or 澳洲幸运5开奖号码历史查询:match the contribution of the employee up to a certain percentage of th🍃eir salary.

Contribution Limits

The IRS has 澳洲﷽幸运5开奖号码历史查询:established annual contribution limits for 401(k)s. For 2023, the maximum contribution limit for a 401(k)—as an employee—is $22,500 (increasing to $23,000 in 2024). If you are 50 or older, you can make an additional catch-up contribution of $7,500 in both 2023 and 2024. In other words, if you're 50 or older, your ann👍ual limit for total 401(k) contributions is $30,000 for 2023 and $30,500 for 2024.

The IRS also sets limits for 澳洲幸运5开奖号码历史查询:total contributions—both employee and employer—to a defined contribution retirement plan. For 2023, the annual total contributions to an employee's plan cannot exceed $66,000 or $73,500, including the catch-up contribution. For 2024, the contributions increase to $69,000 and $76,500, respectively. However, most employers do not contribute the maximum amount to an employee's retirement plan.

Defined-Benefit Plans

The other type of qualified plan is called a defined-benefit plan. These plans are increasingly uncommon. Defined benefit means that the plan stipulates a certain amount is due to the account holder at the time of retirement, regardless of employer or employee contributions or the welfare of the business. These plans are typically either pensions or annuities.

In a 澳洲幸运5开奖号码历史查询:pension plan, the employee receives a certain amount per year after retirement based on their salary, years of service, a💙nd a predetermined percentage rate. Th🎶e burden is on the employer to make plan contributions calculated to accrue to the necessary amount by the time of employee retirement.

With an annuity plan, the account holder receives a fixed amount for every year after retirement, generally until death. Some plans have a shorter benefit period, and some include benefits for the surviving spouse after the account holder's death. Again, it is the employer's responsibility to make plan contributions that provide for the payment of these benefits down the road.

Other Ways to Save for Retirement

On the other end of the spectrum, profit-sharing plans rely solely on contributions made by the employer, totally at its discretion. This type does allow employers to contribute more during years when the business is doing well, but it also allows them to contribute little or nothing in years when it is not.

A subset of this type of plan is a stock-bonus plan in which employer contributions are made in the form of company stock. Again, this can be great if the company is doing well when you are ready to retire.

Roth and Traditional IRAs

Still, it can also mean you need to start contributing to an individual plan like an 澳洲幸运5开奖号码历史查询:individual retirement account (IRA) or a Roth IRA to make sure you are taken care of in the event the business fails. Both the Roth and the traditional IRA grow your earnings tax-free, but traditional IRAs give you a tax deduction in the years of the contributions, but withdrawals in retirement are taxed. However, Roth gives no tax deduction upfront, but withdrawals in retirement are tax-free.

The annual contribution limit to a Roth and traditional IRA is $6,500 for 2023 and $7,000 for 2024. For individuals aged 50 and over, a catch-up contribution of $1,000 is allowed for both years.

The Bottom Line

Qualified retirement plans, such as a 401(k) and 403(b) plan, are great ways to save for retirement if you have access to them. They allow for large amounts to be saved every year, provide tax benefits, and most often have a matching component from the employer. If you're looking to start saving for retirement, a qualified retirement plan is a good way to begin.