There are two main categories of retirement plans. One category of plan is set up by you, the individual taxpayer, and is appropriately called an individual retirement account, or IRA.
There are four main types of IRAs:
Another large category of plans, referred to as "qualified plans," consists of plans that are usually set up by an employer, or by you if you're self-employed. A qualified plan is one that qualifies to receive certain tax benefits as described in Section 401 of the U.S. tax code.
Here are the types of qualified plans:
Yes, an IRA, or Individual Retirement Account, is indeed a retirement plan. But it's not a qualified plan. Instead, IRAs are described in Section 408 of the Tax Code and have their own set of rules. One significant difference between qualified plans and IRAs is that qualified plans are established by businesses, while certain types of IRAs—traditional or Roth IRAs—are established by individuals. That means you can set up a traditional or Roth IRA for yourself, whether or not your employer has established a qualified plan for you at work.
Other types of IRAs, known as SEPs and SIMPLE IRAs, are for businesses and must be established by an employer (or self-employed person. For example, the employer might be a corporation, a sole proprietor, or a partnership. SEPs and SIMPLE IRAs permit larger tax deductions than do traditional or Roth IRAs.
The first two types of IRAs are purely individual accounts, while the second two types of IRAs are more like qualified plans; they're set up by employers.
Traditional IRAs allow individuals to make tax-deductible contributions and grow their savings tax-free until they withdraw the funds in retirement.
Roth IRAs are individual retirement accounts that allow individuals to make after-tax contributions so that their savings grow tax-free and their retirement withdrawals are tax-free.
SEP-IRAs allow employers (or self-employed people) to set up a plan where each participant has their own individual retirement account to which the employer and employee can contribute. SEP contributions can be as much as 25% of your annual compensation, up to a maximum contribution of $66,000 (in 2023).
SIMPLE IRAs also allow an employer to set up a plan that consists of individual retirement accounts, but the employer is required to contribute to a SIMPLE IRA. The participant can elect to contribute any percentage of their compensation to the plan, but the total dollar amount can't exceed $15,500 per year (in 2023).
Anyone can open an IRA, while a 401(k) plan has to be set up by an employer. Employers can match a portion of an employee's 401(k) contributions, while IRAs don't offer opportunities for employer-matching contributions.
The maximum amount that a participant can contribute to an IRA is $6,500 (in 2023) per year. The maximum contribution limit for a 401(k) plan is $22,500 per year (in 2023).
IRAs and 401(k) plans also have different rules for taking distributions. For instance, while, the age at which you have to start taking distributions is 73 for both types of plans, if you're still working at that time, the minimum required distribution rules are waived for a 401(k) plan.
401(k) plans are popular with employers because they're less expensive than other types of retirement plans. Contributions constitute the biggest expense for an employer. But in the case of a 401(k) plan, the bulk of the contribution is typically made by the employee—through salary reductions. The employee diverts into the plan a portion of the salary he or she would otherwise receive in cash.
401(k) plans are popular with employees because the plan allows them to save for retirement while simultaneously reducing their current income tax bill. Employees don't pay income tax on salary deferrals until the money comes out of the 401(k) plan, sometime in the future.
Also, employers usually allow employees to change the amount of salary deferred into the plan as the employees' circumstances change. And employees are often permitted to make their own investment decisions, and are frequently given access to their retirement funds through loans or hardship withdrawals. (For more on loans and hardship withdrawals, see Getting Your Retirement Money Early—Without Penalty.)
A Keogh plan is a qualified plan for self-employed individuals. The term Keogh is not a tax term, and you won't find any reference to it in the Tax Code. It's just a bit of retirement planning jargon that refers to the special restrictions placed on qualified plans when they're established by self-employed individuals.
The most onerous restriction is the following: Contributions to retirement plans are often determined by taking a percentage of compensation, but compensation for self-employed individuals is defined differently than it is for employees of corporations. The revised definition often produces a lower contribution limit for a Keogh plan.
If you're vested in your retirement plan, you can take the full amount with you when you leave the company. If you're 50% vested, you can take 50% of it with you when you go. In the case of a 401(k) plan, you're always 100% vested in the salary you defer into the plan, but may not be vested in any employer contributions to the plan (depending on the plan's rules).
Generally, yes. The restrictions on contributions you can make to a retirement plan are applied to each employer separately. If you work for a company, the company is an employer. If you're self-employed, you are a separate employer and can have a separate retirement plan for your business. But be careful. If both you and your employer establish some type of salary reduction plan, you might run up against an overall limit on contributions.
The most common types of salary reduction plans are 401(k) plans, tax-deferred annuity or 403(b) plans (these generally cover university professors and public school teachers), and 457 plans (sponsored by state and local governments and other tax-exempt organizations). A SIMPLE IRA is also a salary reduction plan.
Although the amount of your salary or compensation you can defer into each of these plans is limited, the law also puts a limit on the total amount you can defer into all such plans, if you happen to be covered by more than one. The overall limit depends on the type of plan you participate in.
Most employer plans are safe from creditors, thanks to the Employee Retirement Income Security Act of 1974, commonly known as ERISA. ERISA requires all plans under its purview (generally, qualified plans) to include provisions that prohibit the assignment of plan assets to a creditor. The U.S. Supreme Court has also ruled that ERISA plans are even protected from creditors when you are in bankruptcy.
Unfortunately, Keogh plans that cover only you—or you and your partners, but not employees—are not governed or protected by ERISA. Neither are IRAs, whether traditional, Roth, SEP, or SIMPLE.
But even though IRAs are not automatically protected from creditors under federal law, many states have put safeguards in place that specifically protect IRA assets from creditors' claims, whether or not you are in bankruptcy. Also, some state laws contain protective language that is broad enough to protect single-participant Keoghs, as well.
For a complete guide to all common types of retirement plans, and to help you make sense of the rules that govern distributions from retirement plans, read IRAs, 401(k)s & Other Retirement Plans, by Twila Slesnick and John Suttle (Nolo).
A qualified plan is simply one that is described in Section 401(a) of the Tax Code. The most common types of qualified plans are profit-sharing plans (including 401(k) plans), defined benefit plans, and money purchase pension plans. In general, your contributions are not taxed until you withdraw money from the plan. Most retirement plans that you obtain through your job are qualified plans.
Updated March 3, 2023