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David Lerner Associates: "Qualified plan" - What does it mean?

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Wednesday, August 27, 2014

A qualified plan is an employer-sponsored retirement plan that qualifies for special tax treatment under Section 401(a) of the Internal Revenue Code.

There are numerous different types of qualified plans, but they all fall into two categories. A defined benefit plan (e.g., a traditional pension plan) is generally funded solely by employer contributions and provides you with a defined level of retirement benefits. A defined contribution plan (e.g., a profit-sharing or 401(k) plan) is funded by employer and/or employee contributions. The advantages you receive from the plan depend upon investment performance.

The annual contribution limits and various other guidelines vary among specific kinds of plans. However, most qualified plans discuss certain key features, consisting of:

  • Pretax contributions: Employer contributions to a qualified plan are generally able to be made on a pretax basis. That is, you don't pay income tax on amounts contributed by your employer up until you withdraw money from the plan. Your contributions to a 401(k) plan may also be made on a pretax basis.
  • Tax-deferred growth: Investment earnings (e.g., dividends and interest) on all contributions are tax deferred. Again, you don't pay income tax on those earnings until you withdraw money from the plan.
  • Vesting: If the plan provides for employer contributions, those amounts (and related investment earnings) must vest before you're entitled to them. Check with your employer to find out when this happens.
  • Creditor protection: In most cases, your creditors can not reach your qualified retirement plan funds to satisfy your debts.
  • Roth contributions: Your employer may also allow you to make after-tax Roth contributions to the 401(k) plan. While there's no up-front tax benefit, qualified distributions are totally free from federal income taxes.

If you have access to a qualified retirement plan, strongly consider taking advantage of it. Over time, these plans can provide you with substantial retirement savings.


Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Some of this material has been provided by Broadridge Investor Communications Solutions, Inc.


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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Lawrenceville, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 800-367-3000 Visit our website: www.davidlerner.com

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