Key Takeaways
- Qualified plans receive favorable tax treatment: contributions are tax-deductible and growth is tax-deferred.
- 401(k) 2025 contribution limit: $23,500 ($31,000 with catch-up for 50+).
- SECURE 2.0 'Super Catch-Up' for ages 60-63: $11,250 additional (total $34,750 in 2025).
- Employee deferrals are always 100% vested immediately.
- Employer contributions vest according to a schedule: 3-year cliff or 6-year graded.
- RMDs begin at age 73 (SECURE 2.0); increases to age 75 in 2033.
- RMD penalty reduced to 25% (or 10% if corrected within 2 years).
- Roth 401(k) contributions are after-tax but qualified withdrawals are tax-free.
Qualified Retirement Plans
Qualified retirement plans meet IRS requirements and receive favorable tax treatment. Understanding these plans is essential for retirement planning recommendations.
What Makes a Plan "Qualified"
| Requirement | Description |
|---|---|
| Written Plan | Must be formally documented |
| Benefit Employees | Cannot discriminate in favor of highly compensated |
| Vesting Schedule | Must follow specific vesting rules |
| Contribution Limits | Subject to annual limits |
| Distribution Rules | Must follow RMD and early withdrawal rules |
| Reporting | Annual IRS Form 5500 filing |
Tax Benefits of Qualified Plans
| Benefit | Description |
|---|---|
| Employer Deduction | Employer contributions are tax-deductible |
| Employee Deferral | Traditional contributions reduce current taxable income |
| Tax-Deferred Growth | No taxes on earnings until withdrawal |
| Roth Option | After-tax contributions with tax-free qualified withdrawals |
Types of Qualified Plans
Defined Contribution Plans
The contribution amount is defined; retirement benefit depends on investment performance.
| Plan Type | Eligible Employers | Key Features |
|---|---|---|
| 401(k) | For-profit companies | Employee deferrals + employer match |
| 403(b) | Nonprofits, schools, hospitals | Similar to 401(k), limited investment options |
| 457(b) | State/local government, nonprofits | No 10% early withdrawal penalty |
| SIMPLE IRA | Employers with ≤100 employees | Lower limits, mandatory employer contribution |
| SEP-IRA | Any employer, self-employed | Employer contributions only, up to 25% of comp |
Defined Benefit Plans
The retirement benefit is defined; employer bears investment risk.
| Characteristic | Description |
|---|---|
| Benefit Formula | Based on salary and years of service |
| Investment Risk | Employer bears all investment risk |
| Employer Funding | Employer must fund to meet benefit obligations |
| Common Formula | 1-2% × years of service × final average salary |
| Declining Usage | Less common due to employer cost/risk |
401(k) Plans in Detail
Contribution Limits (2025)
| Contribution Type | Under 50 | Age 50-59 | Age 60-63 | Age 64+ |
|---|---|---|---|---|
| Employee Deferral | $23,500 | $23,500 | $23,500 | $23,500 |
| Standard Catch-Up | — | $7,500 | — | $7,500 |
| Super Catch-Up (SECURE 2.0) | — | — | $11,250 | — |
| Total Employee | $23,500 | $31,000 | $34,750 | $31,000 |
| Total (Employee + Employer) | $70,000 | — | — | — |
Super Catch-Up (Ages 60-63)
SECURE 2.0 created enhanced catch-up contributions for ages 60-63:
- Additional $11,250 (instead of $7,500) in 2025
- Only applies to ages 60, 61, 62, and 63
- Reverts to standard $7,500 at age 64
Traditional vs. Roth 401(k)
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Contributions | Pre-tax | After-tax |
| Tax Deduction | Yes, reduces current income | No |
| Growth | Tax-deferred | Tax-free |
| Qualified Withdrawals | Fully taxable | Tax-free |
| RMDs | Required at 73 | NO RMDs (as of 2024) |
| Best For | Higher tax bracket now | Lower tax bracket now |
High Earner Roth Catch-Up (2026+)
Starting in 2026, catch-up contributions for employees earning over $145,000 MUST be made as Roth (after-tax) contributions.
Exam Tip: Employee deferrals are always 100% vested IMMEDIATELY. Only employer contributions are subject to vesting schedules.
Vesting Schedules
Vesting determines when employer contributions become the employee's property.
Cliff Vesting
All-or-nothing vesting after a specified period.
| Service Years | 3-Year Cliff | Vested % |
|---|---|---|
| 0-2 | Not vested | 0% |
| 3+ | Fully vested | 100% |
Graded Vesting
Gradual vesting over a period (maximum 6 years).
| Service Years | 6-Year Graded | Cumulative |
|---|---|---|
| 1 | 0% | 0% |
| 2 | 20% | 20% |
| 3 | 20% | 40% |
| 4 | 20% | 60% |
| 5 | 20% | 80% |
| 6 | 20% | 100% |
What's Always 100% Vested
| Contribution Type | Vesting |
|---|---|
| Employee deferrals | Always 100% vested |
| Rollover contributions | Always 100% vested |
| After-tax contributions | Always 100% vested |
| Employer match/contributions | Subject to vesting schedule |
Required Minimum Distributions (RMDs)
RMD Age Rules (SECURE 2.0)
| Birth Year | RMD Start Age |
|---|---|
| Before 1951 | 72 |
| 1951-1959 | 73 |
| 1960 and later | 75 |
Key RMD Rules
| Rule | Details |
|---|---|
| First RMD | Due by April 1 of year following RMD age |
| Subsequent RMDs | Due by December 31 each year |
| Penalty | 25% of amount not withdrawn (10% if corrected) |
| Still Working Exception | Can delay if still employed (except 5%+ owners) |
| Roth 401(k) | NO RMDs for account owner (as of 2024) |
RMD Calculation
RMD = Account Balance (Dec. 31 prior year) ÷ Life Expectancy Factor
The life expectancy factor comes from IRS Uniform Lifetime Table.
Exam Tip: RMD penalty is now 25% (not 50%). If corrected within 2 years, penalty drops to 10%. Roth 401(k)s no longer require RMDs as of 2024.
Early Withdrawal Rules
10% Early Withdrawal Penalty
Applies to distributions before age 59½ from most retirement plans.
Exceptions to 10% Penalty
| Exception | Applies To |
|---|---|
| Death | Distributions to beneficiary |
| Disability | IRS definition of disabled |
| Age 55 Separation | 401(k) only, after leaving employer |
| SEPP (72(t)) | Substantially equal periodic payments |
| Medical Expenses | Exceeding 7.5% of AGI |
| Qualified Domestic Relations Order (QDRO) | Divorce-related distributions |
| IRS Levy | To pay back taxes |
| Birth/Adoption | Up to $5,000 within 1 year |
457(b) Plan Exception
457(b) plans have NO 10% early withdrawal penalty regardless of age—only income taxes apply.
What is the maximum 401(k) employee deferral contribution for 2025 for someone age 45?
Under 3-year cliff vesting, an employee who leaves after 2 years receives what percentage of employer contributions?
For someone born in 1960 or later, at what age must RMDs begin under SECURE 2.0?
Which retirement plan does NOT have a 10% early withdrawal penalty?
9.2 Individual Retirement Accounts
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