Series 26

By Investopedia AAA

Retirement and College Savings Plans - Other Qualified Retirement Plans



While the three plans discussed above are the most commonly used employer-sponsored plans, you should be familiar with several others, including:

  • Simplified Employee Pension (SEP) IRAs
    SEP IRAs were created to provide a simpler alternative to profit-sharing plans. SEP IRAs are easy to establish and run, yet employers may still vary their contributions to the plan from year to year, much in the same manner as with a profit-sharing plan.

    Under the rules of a SEP, the employer is required to include all employees that are 21 or older and have worked for the employer during three of the last five years.

    In 2006, an employer may contribute up to 25% of the employee's salary or $44,000, whichever is lowest, to the employee's individual SEP IRA account.

    Learn more about the eligibility requirements, and contributions and distribution rules of SEP IRAs within the SEP IRAs tutorial.

  • Savings Incentive Match Plans for Employees (SIMPLE)
    SIMPLE plans are available for small employers who have 100 or fewer eligible employees (those who make at least $5,000 per year) and who sponsor no other retirement plans for their employees. The SIMPLE contributions may be made either to an IRA or a 401(k). Employees can choose to contribute up to $10,000 per year (for 2005 and 2006, then indexed for inflation) via salary deferral. The employer must contribute either a matching amount up to 3% or a non-elective contribution of at least 2%. SIMPLE plans are so named because they require much less paperwork, administrative testing and costs than other employer sponsored retirement plans.

  • 457 Governmental Plans
    457 plans are similar to 403(b) plans and are available to governmental organizations such as state, county and municipal employers. They are known as deferred compensation plans, and contributions may only be made by the employee via salary deferral. Maximum salary deferral limits are the same as for 401(k) plans.

  • Keogh Plans
    Keogh plans, originally called HR 10 plans, were introduced in 1962 to give tax-deductible retirement benefits to self-employed individuals and owner-employees of unincorporated businesses or professional practices. As with all qualified plans, only earned income can be considered for contribution eligibility. Moreover, if a business is not profitable, no contribution is allowed.
    A self-employed individual is able to contribute to a Keogh even if he or she is also an employee of a corporation with a qualified employer-sponsored retirement plan. However, the investor can only base contributions to the Keogh plan on the income from self-employment activities.

    Employees of a self-employed person may participate in a Keogh plan subject to the following eligibility rules:
    • Full-time employees must receive compensation for at least 1,000 hours of work per year.

    • All employees who contribute to the Keogh plan must be 21 or older.

    • All employees who contribute to the Keogh must have completed one or more years of continuous employment or have been employed on a continual basis from the Keogh plan's start date if fewer than three years have elapsed.

    • An employee who has provided five years of employment must be fully vested in employer contributions.

    • The maximum contribution to a Keogh plan is the lesser of 25% of self-employment earned income or $40,000 indexed for inflation ($44,000 for 2006).

Withdrawals from Qualified Retirement Plans
The taxation of withdrawals is similar to those from an IRA. Withdrawals prior to reaching the age of 59.5 are subject to a 10% tax penalty, as well as ordinary income taxes. There are some exceptions to that 10% penalty:

  • The taxpayer becomes disabled.
  • The employee retires after reaching age 55 (this exception applies only to withdrawals from the current company's plan, not previous employer plans or IRAs).
  • Withdrawals made in case of divorce, as part of a Qualified Domestic Relations Order (QDRO).
  • The beneficiary withdraws funds from the plan after the employee's death.
  • The employee needs money to cover medical expenses that are in excess of 7.5% of adjusted gross income.
  • Withdrawals are made in a series of "substantially equal periodic payments" over the owner's life expectancy.

Funds in a qualified retirement plan may be transferred or rolled over to another retirement plan or IRA without taxation. In the case of a direct transfer or direct rollover, the money is sent directly from the custodian of the plan to the custodian of the new plan. No income taxes are withheld. However, if the employee withdraws the funds directly, there is a mandatory 20% income tax withholding. So if the employee chooses to roll the funds over to another plan, he or she will either have to find the money to deposit that additional 20%, or will have to pay taxes (and penalties, if under the age of 59.5) on the 20% that was not rolled over.

Required Minimum Distribution Rules
The IRS requires distributions to begin from qualified plans (and IRAs) by the April 1 of the year following your attainment of age 70.5. The only exception to this requirement is for those who are still working and the exception applies only to the current employer's plan (not previous employer plans or IRAs). The amount that must be withdrawn is calculated by dividing the account balance by a life expectancy factor. A 50% tax penalty applies to amounts that should have been withdrawn but were not.

Non-Qualified Employer-Sponsored Retirement Plans
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