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What is a Qualified Retirement Plan?

Article Details
  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 September 2019
  • Copyright Protected:
    2003-2019
    Conjecture Corporation
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Qualified retirement plans are any type of structured financial plan for retirement that complies with government regulations and is eligible for special consideration when it comes to the application of taxes. A qualified retirement plan can be established and managed under the auspices of an employer, or be set up by an individual through a bank or other financial entity. In the United States, the Internal Revenue Service or IRS has established specific codes that detail the provisions necessary for any retirement plan to be considered qualified.

The employer based qualified retirement plan can take on many different forms. Most examples of the pension fund are structured to comply with government regulations and afford the employee some tax privileges during the working years. In many instances, it is possible for the employer to deduct contributions to the plan on behalf of eligible employees as a business expense. In return, the employee is not liable for taxes on the pension plan until and as funds are withdrawn from the plan after reaching retirement age.

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Profit sharing plans are another common structure for an employer based qualified retirement plan. Just as with the pension plan, contributions by the employer are placed into the plan on behalf of employees who are eligible for participation. After retirement, the amount withdrawn from the plan each calendar year may be subject to taxes, depending on the current tax structure and the amount of total income generated by the former employee.

Individual retirement planning often involves the use of a qualified retirement plan. This is often a common option for persons who are self-employed, as well as people who wish to establish some additional future security alongside any employer sponsored pension or profit sharing plan. The IRA or Individual Retirement Plan is one of the most commonly employed examples of this type of qualified retirement plan, and allows the individual to divert a certain amount of annual income into the plan without incurring any tax liability for that year. As with most plans, the proceeds from any individual qualified retirement plan will be subject to taxes when withdrawals from the plan take place.

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