Qualified Plans

The definition of a qualified plan is one that meets the IRS regulations outlined in section 401 of the tax code. Qualified plans allow employers to create savings vehicles for their employees which carry special tax rules; one of which allows the employer contribution into the employee account as a tax deductible event. Employees, on the other hand, will use these plans to accumulate wealth and savings at a tax free rate until retirement. A great aspect of a qualified plan, for the employee, is that taxes are deferred on contributions and investment gains until the money is withdrawn.

All employees (as defined by the company) are allowed to participate in taking advantage of participation in qualified plans and are not restricted from taking their contributions and investment profits with them when they leave the company. Usually, most people will transfer the funds to their new companies retirement savings plan or transfer it into another banking institution, such as Fidelity. However, some employers will not allow you to transfer out their match amounts if those contributions have not vested for a minimum amount of time.

The government has set up these plans chiefly for retirement purposes by enacting several distribution rules which prevent early withdrawals; one of those rules is the minimum age requirement attached to many of these plans and also a penalty tax must be paid for early withdrawal.

The most common type of qualified plan is a 401k, but there are a few others; money purchase pension plans, keoghs, target benefit plans, defined benefit plans, employee stock ownership plans, stock bonus plans, and roth 401k plans.

Article Source