What Is a Qualified Retirement Plan?

A qualified retirement plan is a tax-advantaged savings program that meets specific IRS requirements under the Employee Retirement Income Security Act (ERISA). These plans, which include 401(k)s, pensions, and profit-sharing plans, offer tax benefits to both employers and employees. Contributions to a qualified retirement plan may be tax-deductible, and investment earnings can grow on a tax-deferred basis. Employers must follow guidelines related to contribution limits, nondiscrimination rules, and withdrawal restrictions to maintain a plan’s qualified status. These plans are commonly used to help individuals save for retirement while benefiting from structured tax incentives.

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What Is a Qualified Retirement Plan?

A qualified retirement plan is an employer-sponsored savings program that follows IRS and ERISA regulations, offering tax benefits to both employees and employers. These plans must meet strict nondiscrimination rules, ensuring that benefits apply fairly across employees rather than favoring executives or highly compensated individuals.

Unlike nonqualified plans, which offer greater flexibility but fewer tax advantages, qualified plans have specific rules regarding contribution limits, early withdrawals and required minimum distributions (RMDs). These rules help regulate how funds are accumulated and accessed, ensuring that the plan functions primarily as a retirement savings vehicle rather than an immediate source of liquid funds.

Key Features of Qualified Retirement Plans

One of the primary benefits of an employer-sponsored plan is that it allows you to save for retirement on either a tax-deferred or tax-free basis. Money that’s contributed on a tax-deferred basis is not subject to income tax in the year that it is saved. Instead, the money grows tax-deferred until you withdraw it from the plan in retirement. A traditional 401(k) is an example of a tax-deferred retirement account.

Qualified retirement plans may allow Roth contributions, which are taxed upfront but grow tax-free. Since the money has already been taxed, withdrawals from Roth accounts can be made tax-free, assuming certain rules are met.

Also, many qualified plans allow for employer contributions, which can help boost your retirement savings even more. These employer contributions are tax-deductible for the employer and not taxable to the employee until they are withdrawn from the plan in retirement.

The IRS-mandated contribution limits for qualified plans are adjusted periodically for inflation.

Types of Qualified Retirement Plans

Broadly speaking, qualified retirement plans can come in two varieties: defined benefit plans and defined contribution plans. Defined benefit plans are offered by employers and they’re designed to provide employees with guaranteed income in retirement. The employee may make contributions to a defined benefit plan but the burden is primarily on the employer to fund the plan.

When an employee retires, they’re eligible to receive benefits from the plan. Employers calculate benefits using a formula, rather than basing them on actual contributions. Pension plans are types of defined plans that employers can offer.

Defined contribution plans are more common than pensions. With this type of plan, the employee is responsible for funding the plan through elective salary deferrals. The employer can also make matching contributions to the plan, though that’s not a requirement. If you have a 401(k) plan at your job or you’re self-employed and contribute to a solo 401(k), then you have a qualified retirement plan that’s also a defined contribution plan.

Other types of qualified retirement plans include:

403(b) plans
SEP IRAs
SIMPLE IRAs
Keogh plans
Profit-sharing plans
Stock bonus plans
Employee Stock Ownership Plans (ESOPs)
Cash balance plans
Money purchase plans
Nonqualified deferred compensation plans (NQDC)

The main difference between defined benefit and defined contribution plans lies in how they’re funded and what they pay out.

With defined benefit plans, the employer does the funding; with defined contribution plans, the employee can decide how much to contribute. A defined benefit plan offers predictability since you’ll know what it pays out in retirement. Defined contribution plans offer less predictability since payouts depend on contributions, employer matches and investment performance.

Qualified Retirement Plans and Taxes

Qualified retirement plans can help you build savings for the future but the chief advantage revolves around your taxes. Contributions to a defined contribution plan reduce taxable income for the year. Reducing your taxable income can reduce the amount of taxes you have to pay if you’re able to drop into a lower tax bracket or you become eligible for certain tax credits or deductions.

Aside from that, your money can grow over time on a tax-deferred basis. With a 401(k), for instance, you aren’t taxed on your investment gains year over year. Instead, you pay ordinary income tax on qualified withdrawals once you start taking money out in retirement. Of course, if you take money out of your 401(k) before age 59 ½, you’ll owe income tax along with a 10% early withdrawal penalty.

Workplace retirement plans can also make the task of saving easier if your employer matches contributions. Matching contributions are essentially free money you can get just by participating in your company’s plan. Best practices suggest contributing enough to receive the full employer match.

Qualified Retirement Plans vs. Nonqualified Retirement Plans

Nonqualified retirement plans allow you to save and invest for retirement but they aren’t defined or governed by the same tax code rules as qualified plans. They can, however, still offer some tax benefits for retirement savers as most retirement plans offer. The type of tax benefit is going to depend on the plan that you choose.

Examples of nonqualified retirement plans include:

Traditional IRAs
Roth IRAs
Self-directed IRAs
Executive bonus plans
Deferred compensation plans
457 plans

Traditional IRAs provide tax benefits through tax-deductible contributions. You’d then pay taxes on the money when you withdraw it in retirement at your ordinary income tax rate. Roth IRAs don’t allow for deductible contributions, since they’re funded with after-tax dollars. But qualified withdrawals in retirement are 100% tax-free.

Self-directed IRAs allow you to invest in alternatives beyond stocks or bonds. These accounts can be used to hold specific types of investments, such as real estate. A self-directed IRA lets you choose how to invest, but there are specific IRS rules you need to follow to maintain any associated tax benefits.

A simple way to gauge whether you have a qualified or nonqualified plan is to consider whether it’s offered by an employer or whether you set it up yourself. Executive bonus plans, deferred compensation plans and 457 plans are the exceptions since those can be offered by your company. If you have questions about whether you have a qualified or nonqualified plan, that’s something you can talk to your plan administrator about.

Frequently Asked Questions

Is My 401(k) Qualified or Nonqualified?

Most 401(k) plans are qualified retirement plans because they meet IRS and ERISA requirements, offering tax-deferred growth and employer contribution benefits. However, some employers offer nonqualified deferred compensation (NQDC) plans, which do not follow the same tax rules and are typically designed for executives or highly compensated employees.

Is an IRA a Qualified Retirement Plan?

Traditional and Roth IRAs are tax-advantaged accounts but are not considered qualified retirement plans under ERISA. Unlike employer-sponsored plans, IRAs have different contribution limits, rules, and withdrawal restrictions, though they still offer tax-deferred or tax-free growth depending on the type of account.

What Are the Disadvantages of a Qualified Retirement Plan?

Qualified retirement plans have contribution limits, early withdrawal penalties and RMDs for tax-deferred accounts. Employers must comply with strict regulations, which can be costly to administer. Additionally, funds are generally not easily accessible before retirement without tax consequences or penalties.

Bottom Line

Qualified retirement plans can help you build a nest egg in a tax-favored way. If you have a plan at work, then you likely have a qualified retirement plan. And if you’re self-employed or your job doesn’t offer a retirement plan, you could still save for the future by opening an IRA. If you work for yourself and have no employees, a solo 401(k) could also be an option if you’re interested in a plan that allows you to save more for retirement.

Retirement Planning Tips

Consider talking to your financial advisor about qualified retirement plans and where they fit into your overall financial planning strategy. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you have access to a qualified retirement plan at work, such as a 401(k), a free calculator can tell you how much you should be putting away to meet your financial goals. Remember, too that the IRS adjusts for defined benefit and defined contribution plans periodically to account for inflation.