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What To Know About Qualified Retirement Plans

September 13, 2022

What is a qualified retirement plan? A qualified plan is one that meets the IRS’s code requirements for tax benefits, such as tax-deferred contributions. Several types of qualified retirement plans include 401(k)s, 403(b)s, and profit-sharing plans. These qualified retirement plans are commonly employer-sponsored plans that may allow employees to contribute with pre-tax or post-tax dollars.

There are two forms of qualified retirement plans: defined benefit and defined contributions. Some types of qualified retirement are a combination of these two forms. Defined benefit plans provide employees provide a guaranteed payout (benefit) while the employer bears the risk of meeting the guaranteed payout level. Defined contribution plans place the risk on the employee to contribute and earn enough to sustain themselves in retirement. The most common defined contribution plan is a 401(k).

Qualified retirement plans must meet certain criteria to qualify as such. This criteria includes:

  • Employees must receive access to a qualified retirement plan no later than the age of 21 and at least one year of employment with the employer.
  • The maximum compensation limit per employee in 2022 is $305,000 for retirement plan benefits.
  • Employers must prepare a plan document that states what contributions and benefits are available, then abide by that plan document.
  • The 2022 maximum contribution to a defined contribution plan is:
    • $61,000 for an employee under age 50
    • $67,500 for an employee age 50 & up or 100% of the employee’s annual compensation (whichever is less).
  • The 2022 elective deferral limits are a maximum of $20,500 for an employee under age 50 and $27,000 for an employee aged 50 & up (for qualified retirement plans that allow elective deferrals, including 401(k)s)

Now, what are the benefits of qualified retirement plans as an employee?

1.Convenient Retirement Saving

When contributing to an employer-sponsored qualified retirement plan, you can automatically make your contributions from your paycheck. The convenience and discipline of being deducted by HR before issuing your paycheck is more likely to lead to better savings success versus investing monies after they are deposited into your bank account.

2. Employer Matching

Many employers offer to match employee contributions to the company retirement savings plan to incentivize participation. Make sure to take advantage of any employer match because you are missing out on a raise or free money if you do not contribute! Your initial contribution goal as an employee should be at a level to receive the maximum employer match. Your next goal for your contributions is to work toward the annual deferral limit ($20,500 in 2022 for those under the age of 50).

3. Tax Benefits

Employee contributions to a retirement plan can be made with either pre-tax (traditional) or post-tax (Roth) monies. Pre-tax dollars grow tax-deferred with taxes owed on withdrawals. After-tax monies are classified as Roth contributions and taxed before the plan contribution. Roth contributions also grow tax-deferred, but no tax is owed on withdrawals in retirement. The difference between the two is when you pay your taxes. You want to pay the tax on retirement funds when you are in your lowest bracket.

4. Diversified Investments

A diversified portfolio is the key to long-term success for most investors. As such a successful retirement plan should offer a full menu of high-quality investments to accommodate all risk profiles from ultra-conservative to high-octane aggressive.

As an employer, your company retirement plan is an essential component of your overall benefits package. Retirement Plan Services by Firethorn can help your company create a next-level participant experience. Schedule a consultation with us today to raise your company’s retirement plan bar!