The 401(k) and Qualified Plans Tutorial
AAA
  1. 401(k) And Qualified Plans: Introduction
  2. 401(k) And Qualified Plans: Types Of Plans
  3. 401(k) And Qualified Plans: Eligibility Requirements
  4. 401(k) And Qualified Plans: Contributions
  5. 401(k) And Qualified Plans: Distributions
  6. 401(k) And Qualified Plans: Conclusion

401(k) And Qualified Plans: Introduction

By Denise Appleby

During retirement years, income for retirees usually comes from three primary sources:

  • Social Security benefits
  • The regular savings account of the retiree
  • Retirement-plan savings, such as IRAs and employer-sponsored retirement plans
One type of employer sponsored plan is a qualified plan (or qualified retirement plan).

A qualified plan is established by an employer to provide retirement benefits for its employees and their beneficiaries.

A qualified plan may be a defined-benefit plan or a defined-contribution plan. Qualified plans allow the employer a tax deduction for contributions it makes to the plan, and employees typically do not pay taxes on plan assets until these assets are distributed; furthermore, earnings on qualified plan assets are tax deferred.

Why Establish a Qualified Plan?
For a business, choosing the right retirement plan is one of its most important financial decisions because the plan must suit not only the employer's immediate needs but also its financial and business profile.

A qualified plan offers benefits to both employer and employees:

Benefits for Employers:

  • Employers may receive a tax deduction for plan contributions.
  • Employers are able to attract and retain high-quality employees. A qualified plan may be the tiebreaker that wins over a skilled person who is offered relatively similar compensation packages from different potential employers.
  • Employers may be able to claim a tax credit for part of the ordinary and necessary costs of starting up the plan.. With a maximum of $500 per year for each of the first three years of the plan, the credit equals 50% of the cost to set up the plan, administer it and educate employees about it.
Benefits for Employees

  • Employees are provided with some guarantee that their retirement years will be financially secure.
  • For plans that provide salary-deferral features, employees are able to defer paying taxes on a portion of their compensation until their retirement years, when their tax bracket may be lower.
  • Some plans allow employees to borrow from the plan. The interest paid on the loan amount is credited to the employee's account, unlike interest on loans obtained from financial institutions, which is paid to the financial institution.
In order for a plan to maintain its qualified status, it must operate in accordance with requirements as provided by the Internal Revenue Code (IRC), the Department of Labor (DOL) and the Employee Retirement Income Security Act (ERISA) of 1974. Here we take an in-depth look at 401(k) plans, the rules surrounding them and how employees can best use them to their advantage.
401(k) And Qualified Plans: Types Of Plans

  1. 401(k) And Qualified Plans: Introduction
  2. 401(k) And Qualified Plans: Types Of Plans
  3. 401(k) And Qualified Plans: Eligibility Requirements
  4. 401(k) And Qualified Plans: Contributions
  5. 401(k) And Qualified Plans: Distributions
  6. 401(k) And Qualified Plans: Conclusion
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  3. Death Master File (DMF)

    Also known as Social Security Death Index. A list of people whose ...
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  5. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...
  6. MyRA

    A new tax-advantaged retirement account that President Barack ...
  1. What is the minimum amount of money that I can invest in a mutual fund?

    Learn about investing in mutual funds even with a smaller initial investment; there are many funds available to investors ...
  2. How do Pay As You Go pension plans work?

    Learn how pay-as-you-go pension plans are different than fully funded pension plans and why some government plans are running ...
  3. Who is eligible for a Teacher Retirement?

    Learn about the retirement option, the Teacher Retirement System, offered to teachers and other public school employees, ...
  4. What's the difference between a financial advisor and a financial planner?

    Seeking professional advice from a financial advisor may involve asking for financial help from a certified financial planner, ...
Related Tutorials
  1. By midlife, you're likely to have accumulated a string of IRAs, 401(k)s and the like.
    Retirement

    Consolidating Your Retirement Money

  2. Retirement

    Analyzing The Best Retirement Plans And Investment Options

  3. Budgeting

    The Complete Guide To Retirement Planning For 40-Somethings

  4. Retirement

    The Complete Guide To Retirement Planning For 50-Somethings

  5. Taxes

    The Complete Guide To Retirement Planning For 30-Somethings

Trading Center