Overview of retirement plan types

Overview of retirement plan types

Goals and takeaways

• Define the different types of retirement plans

• Understand the differences between qualified and nonqualified plans

• Review how 401(k), Roth 401(k), SEP, SIMPLE, 403(b), and 457(b) plans operate under federal guidelines

Qualified vs. nonqualified plans

Qualified plans

• Eligibility requirements

• Contribution and distribution rules

• Vesting standards

• Employer contributions are tax-deductible

• Employee contributions and earnings are tax-deferred until distribution

• Defined benefit plans: Guarantee a specific benefit at retirement

• Defined contribution plans: Contributions are defined, but final benefit depends on investment performance

Nonqualified plans

• May favor select employees

• Do not have contribution limits

• Do not offer the same tax advantages as qualified plans

401(k) plans

Key rules

• Plan assets cannot be diverted for purposes other than participant benefits

• Nondiscrimination testing ensures highly compensated employees do not benefit disproportionately

• Elective deferral limit for 2025 is $23,500 (with an additional $7,500 catch-up for employees age 50+)

• Vesting must meet federal standards (e.g., safe harbor plans must fully vest employer contributions immediately)

• Eligibility generally requires employees to be age 21 with at least one year of service

• Distributions can only occur after a qualified event, such as retirement, termination, hardship, or death

• Required minimum distributions (RMDs) must begin after reaching age 73

Taxation

• Employee contributions are made pre-tax (federal income tax only)

• FICA (Social Security and Medicare) still applies

• Employer contributions are not taxed until distribution

• Employees are taxed on all distributions (contributions + investment earnings)

Roth 401(k) plans

What’s the same

• Follows the same eligibility, vesting, and contribution rules as traditional 401(k) plans

• Contribution limits are combined with traditional 401(k) totals

• Includes the same catch-up contribution rules for employees age 50+

What’s different

• Contributions are after-tax

• Distributions are tax-free, including investment gains, if qualified

• Contributions do not reduce taxable wages

Other retirement plan types

SEP (Simplified Employee Pension)

• Allows employers to contribute directly to a SEP-IRA for each eligible employee

• No employee deferrals; employer-only contributions

• Simple to administer, no annual IRS filing

SIMPLE plans

• For companies with 100 or fewer employees earning at least $5,000

• Two types: SIMPLE IRA and SIMPLE 401(k)

• Employees make salary reduction contributions

• Employers contribute either matching or nonelective contributions

403(b) plans

• Available to employees of public schools and certain nonprofits

• Operates similarly to 401(k) plans

• Same contribution and catch-up limits

457(b) plans

• For employees of state/local governments and some tax-exempt organizations

• Classified as nonqualified

• Can be discriminatory

• Same deferral and catch-up limits as 401(k)/403(b) plans