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Overview of retirement plan types

Explore various retirement plan types, including 401(k), Roth 401(k), SEP, SIMPLE, and more.

Overview of retirement plan types

Goals and takeaways

  • Define the different types of retirement plans
  • Understand the differences between qualified and nonqualified plans
  • Review how 401(k), Roth 401(k), SEP, SIMPLE, 403(b), and 457(b) plans operate under federal guidelines

Qualified vs. nonqualified plans

Qualified plans

A qualified plan meets the standards of IRC §401(a), including:

  • Eligibility requirements
  • Contribution and distribution rules
  • Vesting standards

Tax benefits include:

  • Employer contributions are tax-deductible
  • Employee contributions and earnings are tax-deferred until distribution

There are two main types of qualified plans:

  • Defined benefit plans: Guarantee a specific benefit at retirement
  • Defined contribution plans: Contributions are defined, but final benefit depends on investment performance

Qualified plans must undergo annual nondiscrimination testing to ensure fairness for non-highly compensated employees.

Nonqualified plans

Nonqualified plans do not meet IRC §401(a) standards and:

  • May favor select employees
  • Do not have contribution limits
  • Do not offer the same tax advantages as qualified plans

401(k) plans

A 401(k) is a defined contribution qualified plan where employees defer a portion of their salary, often matched by employer contributions.

Key rules

  • Plan assets cannot be diverted for purposes other than participant benefits
  • Nondiscrimination testing ensures highly compensated employees do not benefit disproportionately
  • Elective deferral limit for 2025 is $23,500 (with an additional $7,500 catch-up for employees age 50+)
  • Vesting must meet federal standards (e.g., safe harbor plans must fully vest employer contributions immediately)
  • Eligibility generally requires employees to be age 21 with at least one year of service
  • Distributions can only occur after a qualified event, such as retirement, termination, hardship, or death
  • Required minimum distributions (RMDs) must begin after reaching age 73

Taxation

  • Employee contributions are made pre-tax (federal income tax only)
  • FICA (Social Security and Medicare) still applies
  • Employer contributions are not taxed until distribution
  • Employees are taxed on all distributions (contributions + investment earnings)

Example:

An employee contributes $125,000, receives $50,000 in employer match, and earns $75,000 in growth, totaling $250,000. Upon withdrawal, all $250,000 is subject to federal income tax, but not FICA.

Roth 401(k) plans

What’s the same

  • Follows the same eligibility, vesting, and contribution rules as traditional 401(k) plans
  • Contribution limits are combined with traditional 401(k) totals
  • Includes the same catch-up contribution rules for employees age 50+

What’s different

  • Contributions are after-tax
  • Distributions are tax-free, including investment gains, if qualified
  • Contributions do not reduce taxable wages

Other retirement plan types

SEP (Simplified Employee Pension)

  • Allows employers to contribute directly to a SEP-IRA for each eligible employee
  • No employee deferrals; employer-only contributions
  • Simple to administer, no annual IRS filing

SIMPLE plans

  • For companies with 100 or fewer employees earning at least $5,000
  • Two types: SIMPLE IRA and SIMPLE 401(k)
  • Employees make salary reduction contributions
  • Employers contribute either matching or nonelective contributions

403(b) plans

  • Available to employees of public schools and certain nonprofits
  • Operates similarly to 401(k) plans
  • Same contribution and catch-up limits

457(b) plans

  • For employees of state/local governments and some tax-exempt organizations
  • Classified as nonqualified
  • Can be discriminatory
  • Same deferral and catch-up limits as 401(k)/403(b) plans