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Qualified retirement plans are “qualified” because of the tax treatment that they receive under the Internal Revenue Code. Normally the qualified retirement plans are set up by employers as part of the employee benefit packet. To be on the lists of qualified retirement plans, the plan as to meet requirements set by the Internal Revenue Code When meeting these requirements the employer or self-employed individual is allowed to deduct the contributions to the plans Employees may be allowed to make additional contributions — pre-tax — and the employees are not immediately taxed on the contributions made.

A qualified retirement plan is one that meets the requirements of section 401(a) Internal Revenue Code and the Employee Retirement Income Security Act of 1974. The plans provide favorable tax treatment but the tax treatment is different for each one. Here are the three lists of qualified retirement plans. One list is a broad category encompassing more of the category. Here is the category of qualified retirement plans.

Defined benefit plan

Defined contribution plan

Hybrid plan

The “defined benefit plan” is simply the plan that is NOT a defined contribution plans promising a fixed or at least a determinable monthly payment at the time that the employee retires. Then compared to the “defined contribution plan” it does not generate a fixed level of benefits when the employee retires. Contributions are made by the employee but at the time of retirement the amount that the employee will receive is adjusted to the expenses or losses that the account has had. Consequently the employee has no way of determining an exact amount that he or she will receive at the time of retirement. The “hybrid plan” combines the features of the defined benefit and the defined contribution plans.

The second of the lists of qualified retirement plans covers the types of qualified retirement plans.

Annuity Plans

Money Purchase Plans

Pension Plans

Profit-sharing plans

“Annuity Plans” are distinguished by various things. Some of the annuity plans are the retirement annuity plan; the tax-sheltered annuity plan, self-directed annuity plan; immediate income annuity; single premium annuity plan, and many others. “Money Purchase Plans” has been referred simply to a pension plan. A fixed percentage of compensation is to be contributed to each of the eligible employees which the company or business has, annually. The “pension plan” is a steady income that is given to an employee at the time of retirement in the form of a guaranteed annuity. “Profit-sharing plans” are retirement plans where the employer is the only one contributing between 0% and 25% of participants who are eligible to participate in the plan. There is usually a maximum amount for each year.

The third of the lists of qualified retirement plans covers specific qualified retirement plan identified by the benefits received.

Government or 457 plans

Keogh plans

SIMPLE plans

Tax-shelter plans

401(k) plans

Each of these plans has various definitions of tax advantages. They may be defined contribution or defined benefit or particularly for the self employed.

An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a “taxing” experience. Fortunately, there are exceptions to early distributions.

Any payment that you receive from your IRA or qualified retirement plan before you reach age 59

Qualified retirement plan

This form of retirement plan is one that is certified by the ” Internal Revenue Code Section 401(a)” and the “Employee Retirement Income Security Act of 1974 (ERISA)” therefore it has more advantages regarding tax treatment, allowing employers to subtract yearly permissible contributions for every participating employee and the earnings on these contributions are “tax-deferred” until taken out for every participant; and some taxes may be deferred further by means of transferring into another different kind of IRA.

Let’s look at what this can do for employers.

First of all it can Draw experienced employees into their company. It can also motivate and retain good employees. It encourages employees to set aside financial aid for future use or for retirement because the benefits of the Social Security alone are not enough to support a sensible way of living for retirees, and it can Protect plan assets from creditors.

Two main categories of “Qualified retirement plans”

1. “Defined benefit plans” are company retirement plans, like pension plans, where when an employee, on reaching retirement, will receive a specified amount that is usually based on his salary and number of years in the service, whereby the employer carries the full risk in investment. Both employer and employee, or just the employee alone, can contribute.

2. “Defined contribution plan”. This type of plan outlines the amount that flows to employees and how much should be contributed by an employer each year to the retirement plan. It also keeps account balances of all members, and states that no member should receive an allotment greater than 25% of compensation or 30,000 dollars, (whichever is the lesser of the two) throughout any year.

“Non-qualified retirement plan”

These type of retirement plans do not meet requirements set by “Internal Revenue Code Section 401(a)” and the “Employee Retirement Income Security Act of 1974 (ERISA)”. They are financed by employers therefore are flexible compared to “qualified retirement plans” but do not have the tax benefits that “qualified retirement plans” offer. Benefits, structured in annuities form, are paid generally at retirement age and are liable to “tax” just like “ordinary income tax”; or in “lump sum” or in a payment that may be transferred or converted into IRA, to suspend or defer taxes.

“Top-Hat plans” (THP), “Excess benefit plans” (EBP) and “Supplemental executive retirement plans” (SERP) are types of non-qualified and deferred compensation plans patterned to complement or enhance “qualified retirement plans”.

“Non-qualified retirement plan” supplement “qualified retirement plans” by compensating the benefits that are unavailable to qualified plans and typically covers higher paid company employees. It may be non-funded or funded. The huge disadvantage with this plan is that there is no security promised to the employees in the event that the company should go into bankruptcy, or is sold to another company.

You must always know your options and should develop a plan way before your retirement. Pursuing professional investment advice will help you manage and synchronize your options with a complete and secure financial plan.

After you leave a job, there is a big tax question you will have to deal with and that is what should you do with any money you have in a qualified retirement plan with that former employer. This included the 401(k), stock bonus, profit-sharing and any other qualifying plan. Generally you would be advised to roll it all into an IRA.

While this usually makes a lot of sense, it allows you to take management of your funds for retirement and continue deferring taxes on income the funds generate. Be aware though, if this process is not handled correctly the rollover can end up being very costly. Let us take a look at the property way your should arrange your rollover tax-free.

Roll over directly (trustee to trustee)

If the decision to rollover is what you made, make sure you plan for a trustee-to-trustee or direct rollover from your retirement account into a rollover IRA. Don’t have the check written to you personally, make the check you receive from your company’s plan out to the trustee or the custodian of your new rollover IRA. You can even have a wire transfer made into your new IRA rollover account.) Since the new IRA has to be set up before you receive the rollover, your IRA account can remain empty until the rollover transaction is made.

The direct rollover is essentially important because if you get the check made payable to yourself there is a 20% taxable amount withheld for the federal income tax. Leaving you with sixty days to get the “missing” 20 percent and put it in the rollover IRA. And you will end up owing taxes on that 20%. And you will end up paying the dreaded ten percent early withdrawal tax as well if you are under 55.

If you are Over 55 you Should not Rollover Any of the Money You Need

Generally rollovers are good because they defer the taxes, but think about it this way… you are over 55 and you get a payout from the former employer’s retirement plan, you will not have to pay the premature 10% withdrawal tax if you keep the money (but you will still owe the income taxes). But if you roll that money into the IRA and then you need to take some out later, before the age of 59.5, you will have to pay a ten percent penalty tax on it.

Obeying the 60-Day Rule

This is another pitfall in the rollover, failure to meet their 60-day ruling. You will have to deposit the distribution into the new rollover IRA within the 60 day period in order to get the tax-free rollover. This 60-days will start the day after the funds are received from the company’s retirement account. And if the 60-day period ends on a holiday or weekend, you will not get any slack.

The Bottom Line Is

It might seem like a simple task, however arranging your tax-free rollover of your retirement account is not so simple. I have seen failed rollover attempts from people many years now and there is no end in sight. Ask the advice of a tax pro to clarify anything you don’t understand that we went over in this article.