11.2 Retirement Plans Overview
Key Takeaways
Defined benefit plans place investment risk on the employer.
Defined contribution plans place risk on the employee.
2026 401(k) limit is $24,500 plus catch-up contributions.
457 plans have separate limits from 401(k) and 403(b).
SEP IRAs are employer funded up to 25% of compensation.
SIMPLE IRAs serve small employers with lower limits.
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:
Example Calculation:
- Benefit Rate: 2%
- Years of Service: 30 years
- Final Average Salary: $100,000
- Annual Pension: 2% x 30 x $100,000 = $60,000/year
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 |
2026 Defined Contribution Plan Limits
401(k), 403(b), and Most 457 Plans
| Limit Type | 2026 Amount |
|---|---|
| Employee Deferral | $24,500 |
| Catch-Up (Age 50-59, 64+) | +$8,000 = $32,500 total |
| Super Catch-Up (Age 60-63) | +$11,250 = $35,750 total |
| Total (Employee + Employer) | $72,000 |
| Total with Catch-Up (50+) | $80,000 |
| Total with Super Catch-Up | $83,250 |
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 $72,000 (2026) |
| 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 |
| 2026 Limit | Lesser of 25% of compensation or $72,000 |
| Deadline | Tax filing deadline (with extensions) |
| Administration | Minimal paperwork |
SIMPLE IRA
| Feature | Description |
|---|---|
| Eligible | Employers with ≤100 employees |
| 2026 Employee Limit | $17,000 ($21,000 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
- 2026 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
- 2026 401(k) limit: $24,500 (+$8,000 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
In a defined benefit plan, investment risk is borne by:
The employee
The employer
The government
Both equally
The 2026 employee elective deferral limit for a 401(k) plan for someone under age 50 is:
$7,500
$24,500
$32,500
$72,000
A 457(b) plan differs from a 401(k) plan in that the 457(b):
Has lower contribution limits
Has a separate contribution limit from 401(k) and no 10% early withdrawal penalty
Is only available to private sector employees
Does not allow catch-up contributions
Sections you finish are checked off in the contents.