What are Qualified Retirement Plans? (Full Explanation)

Planning for retirement is one of the single most important financial moves that you can make throughout your career. And if you do this correctly, you can enjoy a stress-free, peaceful retirement in which you can maintain your lifestyle and still live comfortably even after you're working. Today, I'm going to cover qualified retirement plans, which are one of the best retirement saving vehicles on the market. This will be the first of a three part series in which I will take a deep dive into retirement plans and their tax advantages. But before I get started, don't forget to pick up a copy of my ebook The Short-Term Rental Rule. In this book, I teach you how to use short-term rentals to save an enormous amount of money on taxes if you're a W-2 taxpayer. So be sure to check that out. Without further ado, let's dive in. What are qualified retirement plans? A qualified retirement plan is a retirement plan that is sponsored by an employer and meets the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act, known as EIRSA. The Employee Retirement Income Security Act is a federal law that establishes minimum standards for most voluntarily established retirement and health insurance plans in the private sector. But the goal of this act is to provide protection for employees who enroll in these programs. EIRSA went into effect in 1974, and it does all of the following. It sets minimum standards for participation, vesting, benefit, accrual and funding. It provides fiduciary responsibilities for those who control and manage plan assets and requires plans to establish a grievance and appeals process for participants to get benefits for their plans. It gives participants the legal right to sue for benefits and breaches of fiduciary duty. It guarantees payments of certain benefits through a federally chartered corporation known as the Pension Benefit Guarantee Corporation if a defined benefit plan is terminated. So EIRSA makes sure that private sector employees who invest in employee sponsored retirement plans are protected from a wide array of potential hazards. And this is beneficial for you as an employee, because it makes sure that it's much safer to actually move forward with a qualified retirement plan. Here are the requirements for qualified retirement plans. In order to have their retirement plans classified as qualified retirement plans, employers have to meet a lot of criteria set forth by the IRS. For example, employees of the company have to be eligible to participate in the plan no later than the date that they turn 21 or the date that they complete one year of service at the company. Whichever comes later. Also, after they reach the point where they are able to participate, employees have to be allowed to join the plan no later than the first day of the first plan year, beginning after the date when they met the minimum age and service requirements or six months after the date when they satisfied those requirements, whichever comes earlier. These time requirements are there to make sure that employees are not barred from joining the qualified plans just because they are new to the company or because they're in their early 20s. Importantly, plan sponsors and administrators are required by law to act as fiduciaries for qualified retirement plans. This means that they are obligated to make investment decisions based on the best interests of the participants of the plan. If they fail to do this, then they could actually be held personally responsible and be forced to make up any losses. Now, in addition to these rules, the US tax code imposes rules for employer matching, vesting rollovers, contributions, distributions, and much more. So it's safe to say there are strict guidelines for qualified retirement plans, and these guidelines are there to protect employees. What types of qualified retirement plans are there? There are two primary types of qualified retirement plans. The first is defined benefit, and the second is defined contribution. Defined benefit plans are plans that guarantee employees a payout after retirement. With these plans, the risk is put onto the employer to save and invest properly in order to meet all plan liabilities. Here's a quick breakdown of some of the main types of defined benefit plans. Traditional annuity type pensions are one of the most common defined benefit qualified retirement plan. These pensions provide a steady stream of income throughout the length of a person's retirement, as opposed to a large one time lump sum. The payment amounts for the guaranteed income is usually determined by a number of factors, such as the employee's salary and their length of service. There's also cash balance plan. A cash balance plan is a defined benefit plan in which participants receive a set percentage of their salary plus interest during retirement. What about defined contribution plans? Defined contribution plans are different from defined benefit plans in that the amount of money that employees get in retirement through these plans depends heavily on how much they contribute to the plans during their career and how successfully these funds are being invested. There are also other factors that can determine how much money will be available in these plans during retirement, such as whether or not the employer offers contribution matching. Here's a quick breakdown of some of the main types of defined contribution plans. 401Ks. 401Ks are the most common defined contribution plan. There is about 60 million Americans regularly who contribute to 401Ks. With 401Ks, you put money into a retirement plan that is sponsored by your employer. This money gets invested and it is expected to grow over time. 403Bs. 403Bs are defined contribution plans that are similar to 401Ks. However, they are only available for employees of public schools or other tax exempt organizations. If you're a teacher or if you work for a charity, then this could be a good option for you from a retirement perspective. There's also employee stock ownership plans. Employee stock ownership plans, which are known as ESOPs. ESOPs are qualified retirement plans that give workers ownership interest in the company by distributing shares of stock to them. One of the main reasons why many companies prefer these retirement plans is that they can help to provide extra motivation to employees to work hard since the employees will be shareholders of the actual company. And profit sharing plans. Profit sharing plans are very similar to employee stock ownership plans. However, instead of getting paid in shares of stock in the company, employees get paid a percentage of the company's profit based on the company's quarterly or annual earnings. By the way, guys, don't forget to share this video with your friends and family so that they can learn this valuable information, too. Let's go over some of the tax benefits of qualified retirement plans. The good news about qualified retirement plans is that both employers and employees get tax benefits from these accounts. For example, employers can get a tax deduction for the contributions that they make to the plans. So if an employer matches $10,000 worth of 401K contributions to an employee, this would create a tax deduction for that business. For many qualified retirement plans, employees also get tax deductions. And this is because contributions can be made with pre-tax dollars, which lowers taxable income, resulting in lower overall taxes. So, for example, if an employee has a traditional 401K and if he contributes $15,000 to the 401K, then his or her taxable income would be reduced by $15,000. Guys, this is a major tax advantage for employees. And throughout the length of an entire career, it can lead to a tremendous amount of taxes being saved. The taxes on earnings inside of your account in the 401K can also be deferred until you withdraw them. So this means that the account can grow tax free until you're ready to start taking money out. Then the money will be taxed. However, keep in mind that not all retirement accounts have the same tax benefits. For example, Roth 401Ks are not funded with pre-tax dollars. In fact, they are funded with after-tax dollars. This means that you pay taxes on your income, then contribute to your Roth 401K with money that has already been taxed. You do not have to pay taxes on the funds when you withdraw them. It is crucial to be aware that different types of retirement accounts can have different tax advantages. What are non-qualified retirement plans? Just like how there are qualified retirement plans, there are also non-qualified retirement plans. Non-qualified retirement plans are employer-sponsored retirement plans that do not meet all the requirements of the government in order to be considered qualified retirement plans. Because of this, they are not eligible for all the same tax benefits as qualified retirement plans. It's common for companies to use these types of plans as either a reward or additional incentive for executives or other leaders in the company. There are four main types of non-qualified retirement plans. Deferred compensation, executive bonus plans, split dollar life insurance plans, and group carve-out plans. Because this video focuses primarily on qualified plans, I'm not going to explain these plans in this video. I'll save that for a different video. But know for now that some of the main types of non-qualified retirement plans can help you to retain key employees inside of your organization. So I get asked, are qualified retirement plans insured by the government? I mean, generally speaking, defined contribution plans are not insured. Defined benefit plans, on the other hand, often have insurance. For example, many traditional pensions are insured by the Federal Pension Benefit Guarantee Court. So if you happen to have a traditional benefit that has this type of insurance, then yes, your retirement is extra secure. Now, you might be asking yourself, did you get a qualified retirement plan? I mean, having a qualified retirement plan can be a excellent way to boost your retirement savings. Not only do these plans help you to insure tax savings, but they also can provide you with key tax benefits that can help to reduce your tax burden during the duration of your career. Unfortunately, too many people do not save enough for retirement. Then when they hit retirement age, they either have to keep working or they have to dramatically alter their lifestyle to account for the major decreases in income. If you plan for retirement properly, then hopefully you won't have to do this. So if your employer offers a qualified retirement plan, such as a pension or a 401k or a 403b, I strongly recommend taking it. All right, guys, we've covered a lot of information in this video. Here are some of the quick points that I want you to remember and walk away with. Number one, qualified retirement plans are retirement plans sponsored by an employer that meets the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act, which is also known as EIRSA. Number two, there are two different types of qualified retirement plans, defined benefit plans and defined contribution plans. And number three, both employers and employees can get tax benefits from qualified retirement plans. Number four, only some qualified retirement plans are insured by the government and insurance typically only applies to defined benefit plans. OK, now I just want to remind you guys that my five day tax free wealth event will be taking place from March 4th through the 8th. I'll teach you the absolute best tax strategies that I know. And many of these strategies are used by the top one percent of the wealthiest Americans in the United States. So be sure to grab a ticket. If you can attend this event, it'll be digitally anywhere from an hour to an hour and a half a day over the course of five days. If you're serious about wanting to save big money in taxes, then this event is definitely for you. You can find a link in the description below this video to sign up for the challenge. Feel free to sign up as a VIP to spend some additional time with me to get your questions answered. OK, that's all that I got for today's video, guys. As always, don't forget to like, comment and subscribe. And if you haven't already done so, click that button. Thank you so much for watching. And I look forward to seeing you in the next video. Cheers.