3.6 Retirement Plans

Retirement accounts offer significant tax advantages for long-term savings. Understanding the differences between qualified and non-qualified plans, as well as individual retirement accounts, is essential for the SIE exam.

Qualified vs. Non-Qualified Plans

Qualified Plans

Qualified plans meet IRS requirements under ERISA and receive favorable tax treatment:

Contributions: Often tax-deductible

Growth: Tax-deferred

Withdrawals: Taxed as ordinary income

Examples: 401(k), 403(b), pension plans

Non-Qualified Plans

Non-qualified plans don't meet all IRS requirements:

Contributions: After-tax (not deductible)

Growth: Tax-deferred

Withdrawals: Only growth is taxed

Examples: Deferred compensation, executive bonus plans

Traditional IRA

A Traditional IRA (Individual Retirement Account) allows tax-deductible contributions with tax-deferred growth.

Key Features

Contribution Limit (2026): $7,500 ($8,600 if age 50+)

Tax Treatment: Contributions may be deductible

Growth: Tax-deferred

Withdrawals: Taxed as ordinary income

Early Withdrawal Penalty: 10% before age 59 1/2

RMDs: Required at age 73

Contribution Deductibility

Deductibility depends on income and whether you have a workplace plan:

No workplace plan: Fully deductible

Have workplace plan: Income limits apply

Spouse has workplace plan: Higher income limits

Note: Even if not deductible, contributions can still be made (non-deductible Traditional IRA).

Roth IRA

A Roth IRA offers tax-free growth and withdrawals, funded with after-tax dollars.

Key Features

Contribution Limit (2026): $7,500 ($8,600 if age 50+)

Tax Treatment: Not deductible (after-tax)

Growth: Tax-free

Qualified Withdrawals: Tax-free

Early Withdrawal Penalty: 10% on earnings before 59 1/2

RMDs: Not required

Income Limits for Contributions (2026)

Single: Full contribution under $153,000; phase-out $153,000 - $168,000; no contribution over $168,000

Married Filing Jointly: Full contribution under $242,000; phase-out $242,000 - $252,000; no contribution over $252,000

Qualified Distribution Requirements

To withdraw earnings tax-free:

1. Account open for 5 years or more

2. Owner is age 59 1/2 or older

3. Or: disability, death, first-time home purchase ($10,000 max)

Key Difference: Roth contributions (your basis) can always be withdrawn tax and penalty-free. Only earnings have restrictions.

Traditional vs. Roth IRA Comparison

Contributions: Traditional - may be deductible; Roth - never deductible

Growth: Traditional - tax-deferred; Roth - tax-free

Withdrawals: Traditional - taxed; Roth - tax-free (if qualified)

Income Limits: Traditional - no (for contributions); Roth - yes

RMDs: Traditional - yes (at 73); Roth - no

Best For: Traditional - expect lower tax bracket in retirement; Roth - expect same or higher tax bracket

Employer-Sponsored Plans

401(k) Plans

401(k) plans are employer-sponsored defined contribution plans:

Contribution Limit (2026): Traditional 401(k) $24,500 ($32,500 if 50+); Roth 401(k) $24,500 ($32,500 if 50+)

Contributions: Traditional 401(k) pre-tax; Roth 401(k) after-tax

Employer Match: Pre-tax (or Roth since 2023) for both

Withdrawals: Traditional 401(k) taxed; Roth 401(k) tax-free (if qualified)

RMDs: Traditional 401(k) yes (at 73); Roth 401(k) none for the owner since 2024

403(b) Plans

Similar to 401(k) but for:

Public schools

Tax-exempt organizations

Churches

457 Plans

Deferred compensation plans for:

State and local government employees

Some non-profit employees

Unique 457 Feature: No 10% early withdrawal penalty (but still taxed as income).

Small Business Retirement Plans

SEP IRA (Simplified Employee Pension)

Who Uses: Self-employed, small businesses

Contribution Limit (2026): 25% of compensation (up to $72,000)

Contributions By: Employer only

Tax Treatment: Traditional IRA rules

SIMPLE IRA

Who Uses: Businesses with 100 or fewer employees

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

Employer Match: Required (up to 3% or 2% flat)

Early Withdrawal Penalty: 25% if within first 2 years

Required Minimum Distributions (RMDs)

Most retirement accounts require withdrawals starting at age 73 (SECURE Act 2.0).

RMD Rules

Traditional IRA: Yes, at 73

401(k): Yes, at 73

Roth IRA: No (while owner is alive)

Roth 401(k): No (while owner is alive, since 2024)

Penalty for Missing RMD

Miss RMD: 25% of amount not taken

Correct within 2 years: Reduced to 10%

Rollovers and Transfers

Direct Rollover (Trustee-to-Trustee)

Funds move directly between institutions

No withholding

No time limit concerns

60-Day Rollover

Funds distributed to account holder

Must redeposit within 60 days

20% mandatory withholding on employer plans

Once per 12 months (IRA to IRA)

Important: Miss the 60-day deadline = taxable distribution + potential 10% penalty.

Early Withdrawal Exceptions

No 10% penalty for:

Death or disability

Qualified medical expenses

First-time home purchase (IRA only, $10,000 limit)

Higher education expenses (IRA only)

Substantially equal periodic payments (72(t))

Age 55 separation from service (employer plans)

Key Takeaways

Traditional accounts: Tax-deferred (pay later)

Roth accounts: Tax-free growth (pay now)

Contribution limits are combined for Traditional + Roth IRAs

RMDs begin at age 73 (except Roth IRAs and Roth 401(k)s)

401(k) limits are higher than IRA limits

SEP and SIMPLE IRAs serve small businesses

Rollovers must be completed within 60 days