What is a qualified retirement plan?
Qualified retirement plans are any type of structured financial plan for retirement that complies with government regulations and is eligible for special consideration when it comes to the application of taxes. A qualified retirement plan can be established and managed under the auspices of an employer, or be set up by an individual through a bank or other financial entity. In the United States, the Internal Revenue Service or IRS has established specific codes that detail the provisions necessary for any retirement plan to be considered qualified. The employer based qualified retirement plan can take on many different forms. Most examples of the pension fund are structured to comply with government regulations and afford the employee some tax privileges during the working years. In many instances, it is possible for the employer to deduct contributions to the plan on behalf of eligible employees as a business expense. In return, the employee is not liable for taxes on the pension plan
A qualified retirement plan is an arrangement hat meets specific requirements found in the Internal Revenue Code. If these requirements are met, the employer is entitled to a current deduction for plan contributions (within limits) and employees are not taxed on plan benefits until they are distributed. There are two general categories of qualified retirement plans: defined contribution plans and defined benefit plans.
A qualified plan is simply one that is described in Section 401(a) of the Tax Code. The most common types of qualified plans are profit sharing plans (including 401(k) plans), defined benefit plans and money purchase pension plans. In general, your contributions are not taxed until you withdraw money from the plan. In addition, and any qualified contributions made on your behalf by your employer are tax deductible. Most retirement plans that you obtain through your job are qualified plans.
A qualified retirement plan is one that qualifies for special tax treatment under IRS Code Section 401. The contributions to a qualified plan are deductible for the employer and not taxed immediately to you. Instead, the contributions grow tax-deferred until you begin making withdrawals — usually after age 59 1/2. If you wait until you retire, you get another tax break because you will probably be in a lower tax bracket after you retire. In short, you keep more of the money you have earned and Uncle Sam gets less. Money in a nonqualified plan may also grow on a tax-deferred basis, but contributions are not deductible and thus will accumulate less cash for retirement.
