11.2 Retirement Plans Overview

Retirement plans provide tax advantages to encourage saving. Understanding the different types is essential for comprehensive financial planning and making suitable recommendations.

Qualified vs. Non-Qualified Plans

Qualified Plans

Plans that meet IRS requirements under the Internal Revenue Code:

Tax Treatment: Employer contributions are tax-deductible

Growth: Tax-deferred

ERISA: Must follow ERISA rules (if employer-sponsored)

Non-Discrimination: Cannot favor highly compensated employees

Vesting: Must follow IRS vesting schedules

Protection: Generally protected from creditors

Non-Qualified Plans

Plans that do NOT meet all IRS requirements:

Tax Treatment: No immediate tax deduction for employer

Discrimination: CAN favor select employees (executives)

ERISA: Less regulatory oversight

Flexibility: More design flexibility

Examples: Deferred compensation, SERPs, stock options

Defined Benefit vs. Defined Contribution

Defined Benefit Plans (Pensions)

The employer promises a specific benefit at retirement.

Promise: Specific retirement benefit (formula-based)

Formula: Based on salary and years of service

Investment Risk: Borne by EMPLOYER

Funding: Employer contributions (actuarially determined)

PBGC: Benefits guaranteed (up to limits)

Prevalence: Declining - mostly government/union

Benefit Formula Example:

Annual Benefit = Benefit Rate x Years of Service x Final Average Salary

Example Calculation:

- Benefit Rate: 2%

- Years of Service: 30 years

- Final Average Salary: $100,000

- Annual Pension: 2% x 30 x $100,000 = $60,000/year

Defined Contribution Plans

The contribution amount is specified; benefit depends on investment returns.

Promise: Specific contribution amount

Benefit: Depends on investment performance

Investment Risk: Borne by EMPLOYEE

Account: Individual account for each participant

Portability: Can roll over to IRA or new employer plan

Prevalence: Most common today

2026 Defined Contribution Plan Limits

401(k), 403(b), and Most 457 Plans

Employee Deferral: $24,500

Catch-Up (Age 50-59, 64+): +$8,000 = $32,500 total

Super Catch-Up (Age 60-63): +$11,250 = $35,750 total

Total (Employee + Employer): $72,000

Total with Catch-Up (50+): $80,000

Total with Super Catch-Up: $83,250

Key Plan Types

401(k): Eligible Employers - Private sector. Key Features: Most common; employer match possible

403(b): Eligible Employers - Schools, nonprofits. Key Features: Similar to 401(k); may include annuities

457(b): Eligible Employers - Government, nonprofits. Key Features: Separate from 401(k) limit; no early withdrawal penalty

SIMPLE IRA: Eligible Employers - 100 or fewer employees. Key Features: Lower limits; mandatory employer contribution

SEP IRA: Eligible Employers - Self-employed/small business. Key Features: Employer contributions only; easy administration

Profit Sharing Plans

Contributions: Employer only (discretionary)

Limit: Lesser of 25% of compensation or $72,000 (2026)

Flexibility: Employer decides contribution each year

Use: Often combined with 401(k)

SEP IRA (Simplified Employee Pension)

Eligible: Self-employed, small businesses

Contributions: Employer only

2026 Limit: Lesser of 25% of compensation or $72,000

Deadline: Tax filing deadline (with extensions)

Administration: Minimal paperwork

SIMPLE IRA

Eligible: Employers with 100 or fewer employees

2026 Employee Limit: $17,000 ($21,000 if 50+)

Employer Contribution: Match up to 3% OR 2% non-elective

Vesting: Immediate 100% vesting

Early Withdrawal: 25% penalty if within first 2 years

In Practice

When advising on retirement plans:

- Maximize employer match first ("free money")

- Consider tax bracket now vs. expected in retirement

- Use the new super catch-up (ages 60-63) when available

- 457 plans have separate limits from 401(k)/403(b) - can contribute to both

On the Exam

Series 65 frequently tests:

- Defined benefit: employer bears risk; defined contribution: employee bears risk

- 2026 contribution limits (especially employee deferral limits)

- Differences between 401(k), 403(b), and 457 plans

- SEP vs. SIMPLE IRA characteristics

Key Takeaways

1. Defined benefit: employer bears investment risk; benefit is guaranteed

2. Defined contribution: employee bears investment risk; benefit varies

3. 2026 401(k) limit: $24,500 (+$8,000 catch-up; +$11,250 super catch-up for ages 60-63)

4. 457 plans have separate contribution limits from 401(k)/403(b)

5. SEP IRA: employer contributions only, up to 25% of compensation

6. SIMPLE IRA: for businesses with 100 or fewer employees, lower limits