Retirement Plans
Retirement accounts offer significant tax advantages for long-term savings. Understanding the differences between qualified and non-qualified plans, as well as individual retirement accounts, is essential for the SIE exam.
Qualified vs. Non-Qualified Plans
Qualified Plans
Qualified plans meet IRS requirements under ERISA and receive favorable tax treatment:
| Feature | Qualified Plan |
|---|---|
| Contributions | Often tax-deductible |
| Growth | Tax-deferred |
| Withdrawals | Taxed as ordinary income |
| Examples | 401(k), 403(b), pension plans |
Non-Qualified Plans
Non-qualified plans don't meet all IRS requirements:
| Feature | Non-Qualified Plan |
|---|---|
| Contributions | After-tax (not deductible) |
| Growth | Tax-deferred |
| Withdrawals | Only growth is taxed |
| Examples | Deferred compensation, executive bonus plans |
Traditional IRA
A Traditional IRA (Individual Retirement Account) allows tax-deductible contributions with tax-deferred growth.
Key Features
| Feature | Traditional IRA |
|---|---|
| Contribution Limit (2025) | $7,000 ($8,000 if age 50+) |
| Tax Treatment | Contributions may be deductible |
| Growth | Tax-deferred |
| Withdrawals | Taxed as ordinary income |
| Early Withdrawal Penalty | 10% before age 59½ |
| RMDs | Required at age 73 |
Contribution Deductibility
Deductibility depends on income and whether you have a workplace plan:
| Situation | Deductibility |
|---|---|
| No workplace plan | Fully deductible |
| Have workplace plan | Income limits apply |
| Spouse has workplace plan | Higher income limits |
Note: Even if not deductible, contributions can still be made (non-deductible Traditional IRA).
Roth IRA
A Roth IRA offers tax-free growth and withdrawals, funded with after-tax dollars.
Key Features
| Feature | Roth IRA |
|---|---|
| Contribution Limit (2025) | $7,000 ($8,000 if age 50+) |
| Tax Treatment | Not deductible (after-tax) |
| Growth | Tax-free |
| Qualified Withdrawals | Tax-free |
| Early Withdrawal Penalty | 10% on earnings before 59½ |
| RMDs | Not required |
Income Limits for Contributions (2025)
| Filing Status | Full Contribution | Phase-Out | No Contribution |
|---|---|---|---|
| Single | < $150,000 | $150,000 - $165,000 | > $165,000 |
| Married Filing Jointly | < $236,000 | $236,000 - $246,000 | > $246,000 |
Qualified Distribution Requirements
To withdraw earnings tax-free:
- Account open for 5 years or more
- Owner is age 59½ or older
- Or: disability, death, first-time home purchase ($10,000 max)
Key Difference: Roth contributions (your basis) can always be withdrawn tax and penalty-free. Only earnings have restrictions.
Traditional vs. Roth IRA Comparison
| Feature | Traditional IRA | Roth IRA |
|---|---|---|
| Contributions | May be deductible | Never deductible |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Taxed | Tax-free (if qualified) |
| Income Limits | No (for contributions) | Yes |
| RMDs | Yes (at 73) | No |
| Best For | Expect lower tax bracket in retirement | Expect same or higher tax bracket |
Employer-Sponsored Plans
401(k) Plans
401(k) plans are employer-sponsored defined contribution plans:
| Feature | Traditional 401(k) | Roth 401(k) |
|---|---|---|
| Contribution Limit (2025) | $23,500 ($31,000 if 50+) | $23,500 ($31,000 if 50+) |
| Contributions | Pre-tax | After-tax |
| Employer Match | Pre-tax (or Roth since 2023) | Pre-tax (or Roth since 2023) |
| Withdrawals | Taxed | Tax-free (if qualified) |
| RMDs | Yes (at 73) | Yes, but can roll to Roth IRA |
403(b) Plans
Similar to 401(k) but for:
- Public schools
- Tax-exempt organizations
- Churches
457 Plans
Deferred compensation plans for:
- State and local government employees
- Some non-profit employees
Unique 457 Feature: No 10% early withdrawal penalty (but still taxed as income).
Small Business Retirement Plans
SEP IRA (Simplified Employee Pension)
| Feature | SEP IRA |
|---|---|
| Who Uses | Self-employed, small businesses |
| Contribution Limit (2025) | 25% of compensation (up to $70,000) |
| Contributions By | Employer only |
| Tax Treatment | Traditional IRA rules |
SIMPLE IRA
| Feature | SIMPLE IRA |
|---|---|
| Who Uses | Businesses with ≤100 employees |
| Employee Contribution (2025) | $16,500 ($20,000 if 50+) |
| Employer Match | Required (up to 3% or 2% flat) |
| Early Withdrawal Penalty | 25% if within first 2 years |
Required Minimum Distributions (RMDs)
Most retirement accounts require withdrawals starting at age 73 (SECURE Act 2.0).
RMD Rules
| Account Type | RMD Required |
|---|---|
| Traditional IRA | Yes, at 73 |
| 401(k) | Yes, at 73 |
| Roth IRA | No (while owner is alive) |
| Roth 401(k) | Yes, but can roll to Roth IRA |
Penalty for Missing RMD
| Situation | Penalty |
|---|---|
| Miss RMD | 25% of amount not taken |
| Correct within 2 years | Reduced to 10% |
Rollovers and Transfers
Direct Rollover (Trustee-to-Trustee)
- Funds move directly between institutions
- No withholding
- No time limit concerns
60-Day Rollover
- Funds distributed to account holder
- Must redeposit within 60 days
- 20% mandatory withholding on employer plans
- Once per 12 months (IRA to IRA)
Important: Miss the 60-day deadline = taxable distribution + potential 10% penalty.
Early Withdrawal Exceptions
No 10% penalty for:
- Death or disability
- Qualified medical expenses
- First-time home purchase (IRA only, $10,000 limit)
- Higher education expenses (IRA only)
- Substantially equal periodic payments (72(t))
- Age 55 separation from service (employer plans)
Key Takeaways
- Traditional accounts: Tax-deferred (pay later)
- Roth accounts: Tax-free growth (pay now)
- Contribution limits are combined for Traditional + Roth IRAs
- RMDs begin at age 73 (except Roth IRAs)
- 401(k) limits are higher than IRA limits
- SEP and SIMPLE IRAs serve small businesses
- Rollovers must be completed within 60 days
What is the primary difference between a Traditional IRA and a Roth IRA?
Under current law, at what age must an individual begin taking Required Minimum Distributions (RMDs) from a Traditional IRA?
An employee receives a distribution from their 401(k) and wants to roll it into an IRA. How many days do they have to complete the rollover to avoid taxes and penalties?
3.7 Education Savings
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