Qualified Retirement Plan

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What is a 'Qualified Retirement Plan'

A type of retirement plan established by an employer for the benefit of the company’s employees. Qualified retirement plans give employers a tax break for the contributions they make for their employees. Qualified plans that allow employees to defer a portion of their salaries into the plan also reduce employees’ present income-tax liability by reducing taxable income. Qualified retirement plans help employers attract and retain good employees.

BREAKING DOWN 'Qualified Retirement Plan'

Qualified plans come in two types: defined benefit and defined contribution. Defined benefit plans give employees a guaranteed payout and place the risk on the employer to save and invest properly to meet plan liabilities. A traditional pension is an example of a defined benefit plan. Under defined contribution plans, the amount employees receive in retirement depends on how well they save and invest on their own behalf during their working years. A 401(k) plan is an example of a defined contribution plan.

Qualified plans only allow certain types of investments, which vary by plan but typically include publicly traded securities, real estate, mutual funds and money market funds. They also specify when distributions can be made, typically when the employee reaches the plan’s defined retirement age, when the employee becomes disabled, when the plan is terminated and not replaced by another qualified plan, or when the employee dies (in which case the beneficiary receives the distributions).

Workers may take distributions from qualified plans before one of these triggering events occurs, but they will be subject to taxes and penalties that might make it unwise to take an early distribution. Some plans also allow employees to borrow from the plan under strict rules about how the loan must be repaid. For example, they may require that the loan be repaid within a certain number of years, that the worker pay interest (which goes back into the plan) on the loan and that the loan be repaid immediately if the employee leaves the job to which the qualified retirement plan is tied.

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