Simple English definitions for legal terms
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A qualified retirement plan is a type of retirement plan offered by employers that meets certain requirements set by the government. These plans allow both the employer and employee to contribute money to the plan, which can grow tax-free until the employee retires. This can help increase the overall retirement benefit. However, there are limits on how much can be contributed and when the money can be withdrawn. Individual retirement accounts (IRAs) can also receive tax-deferred treatment if they meet certain requirements, but qualified retirement plans typically refer to employer-sponsored plans.
A qualified retirement plan is a type of retirement plan offered by employers that meets certain requirements set by the Internal Revenue Code. These plans allow employees to save for retirement on a tax-deferred basis, meaning they do not pay taxes on the money they contribute or the earnings on those contributions until they withdraw the money in retirement.
Examples of qualified retirement plans include:
Employers and employees can both contribute to these plans, and employers can deduct their contributions up to a certain amount. However, there are limits on how much employees can contribute each year, and there may be age requirements for retirement.
For example, let's say an employee contributes $5,000 to their 401(k) plan in a given year. They will not pay taxes on that $5,000 until they withdraw it in retirement. If the plan earns $1,000 in interest that year, the employee will also not pay taxes on that $1,000 until they withdraw it in retirement.
To qualify for tax-deferred treatment, these plans must meet certain requirements, such as being permanent and only benefiting employees. Employers must also make required legal filings to maintain the plan's qualified status.