Retirement Plans Overview
Retirement plans provide tax advantages to encourage saving. Understanding the different types is essential for comprehensive financial planning and making suitable recommendations.
Qualified vs. Non-Qualified Plans
Qualified Plans
Plans that meet IRS requirements under the Internal Revenue Code:
| Feature | Description |
|---|---|
| Tax Treatment | Employer contributions are tax-deductible |
| Growth | Tax-deferred |
| ERISA | Must follow ERISA rules (if employer-sponsored) |
| Non-Discrimination | Cannot favor highly compensated employees |
| Vesting | Must follow IRS vesting schedules |
| Protection | Generally protected from creditors |
Non-Qualified Plans
Plans that do NOT meet all IRS requirements:
| Feature | Description |
|---|---|
| Tax Treatment | No immediate tax deduction for employer |
| Discrimination | CAN favor select employees (executives) |
| ERISA | Less regulatory oversight |
| Flexibility | More design flexibility |
| Examples | Deferred compensation, SERPs, stock options |
Defined Benefit vs. Defined Contribution
Defined Benefit Plans (Pensions)
The employer promises a specific benefit at retirement.
| Feature | Description |
|---|---|
| Promise | Specific retirement benefit (formula-based) |
| Formula | Based on salary and years of service |
| Investment Risk | Borne by EMPLOYER |
| Funding | Employer contributions (actuarially determined) |
| PBGC | Benefits guaranteed (up to limits) |
| Prevalence | Declining—mostly government/union |
Benefit Formula Example: 2% × Years of Service × Final Average Salary (30 years × 2% × $100,000 = $60,000/year pension)
Defined Contribution Plans
The contribution amount is specified; benefit depends on investment returns.
| Feature | Description |
|---|---|
| Promise | Specific contribution amount |
| Benefit | Depends on investment performance |
| Investment Risk | Borne by EMPLOYEE |
| Account | Individual account for each participant |
| Portability | Can roll over to IRA or new employer plan |
| Prevalence | Most common today |
2025 Defined Contribution Plan Limits
401(k), 403(b), and Most 457 Plans
| Limit Type | 2025 Amount |
|---|---|
| Employee Deferral | $23,500 |
| Catch-Up (Age 50-59, 64+) | +$7,500 = $31,000 total |
| Super Catch-Up (Age 60-63) | +$11,250 = $34,750 total |
| Total (Employee + Employer) | $70,000 |
| Total with Catch-Up (50+) | $77,500 |
| Total with Super Catch-Up | $81,250 |
Key Plan Types
| Plan | Eligible Employers | Key Features |
|---|---|---|
| 401(k) | Private sector | Most common; employer match possible |
| 403(b) | Schools, nonprofits | Similar to 401(k); may include annuities |
| 457(b) | Government, nonprofits | Separate from 401(k) limit; no early withdrawal penalty |
| SIMPLE IRA | ≤100 employees | Lower limits; mandatory employer contribution |
| SEP IRA | Self-employed/small business | Employer contributions only; easy administration |
Profit Sharing Plans
| Feature | Description |
|---|---|
| Contributions | Employer only (discretionary) |
| Limit | Lesser of 25% of compensation or $70,000 (2025) |
| Flexibility | Employer decides contribution each year |
| Use | Often combined with 401(k) |
SEP IRA (Simplified Employee Pension)
| Feature | Description |
|---|---|
| Eligible | Self-employed, small businesses |
| Contributions | Employer only |
| 2025 Limit | Lesser of 25% of compensation or $70,000 |
| Deadline | Tax filing deadline (with extensions) |
| Administration | Minimal paperwork |
SIMPLE IRA
| Feature | Description |
|---|---|
| Eligible | Employers with ≤100 employees |
| 2025 Employee Limit | $16,500 ($20,000 if 50+) |
| Employer Contribution | Match up to 3% OR 2% non-elective |
| Vesting | Immediate 100% vesting |
| Early Withdrawal | 25% penalty if within first 2 years |
In Practice
When advising on retirement plans:
- Maximize employer match first ("free money")
- Consider tax bracket now vs. expected in retirement
- Use the new super catch-up (ages 60-63) when available
- 457 plans have separate limits from 401(k)/403(b)—can contribute to both
On the Exam
Series 65 frequently tests:
- Defined benefit: employer bears risk; defined contribution: employee bears risk
- 2025 contribution limits (especially employee deferral limits)
- Differences between 401(k), 403(b), and 457 plans
- SEP vs. SIMPLE IRA characteristics
Key Takeaways
- Defined benefit: employer bears investment risk; benefit is guaranteed
- Defined contribution: employee bears investment risk; benefit varies
- 2025 401(k) limit: $23,500 (+$7,500 catch-up; +$11,250 super catch-up for ages 60-63)
- 457 plans have separate contribution limits from 401(k)/403(b)
- SEP IRA: employer contributions only, up to 25% of compensation
- SIMPLE IRA: for businesses with ≤100 employees, lower limits
Test Your Knowledge
In a defined benefit plan, investment risk is borne by:
A
B
C
D
Test Your Knowledge
The 2025 employee elective deferral limit for a 401(k) plan for someone under age 50 is:
A
B
C
D
Test Your Knowledge
A 457(b) plan differs from a 401(k) plan in that the 457(b):
A
B
C
D
Up Next
11.3 Individual Retirement Accounts (IRAs)
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