A qualified retirement plan is an investment plan offered by an employer that qualifies for tax breaks under the Internal Revenue Service (IRS) and ERISA guidelines. Because an individual retirement account (IRA) is not offered by employers, a traditional or Roth IRA is not considered a qualified plan, although they feature many of the same tax benefits for retirement savers.
Two exceptions that may be offered by an employer are SEP IRAs and SIMPLE IRAs–both of which cater to small-business owners, including self-employed entrepreneurs. Companies may also offer non-qualified plans to employees that might include deferred compensation plans and executive bonus plans. Because these are not ERISA-compliant, they do not enjoy the tax benefits of qualified plans.
Are you scratching your head trying to figure out if your Roth IRA is a qualified account or not? You’re definitely not alone in this confusion. The terms “qualified” and “nonqualified” get tossed around a lot in the financial world, but their meanings can be tricky to pin down, especially when it comes to Roth IRAs.
In this article we’ll dive deep into what makes an account “qualified” where Roth IRAs fit in this classification, and why understanding the difference matters for your retirement planning.
The Short Answer: Technically No, But It’s Complicated
Let me cut to the chase – a Roth IRA is technically not considered a qualified retirement plan in the strictest sense of the term. However, this answer needs some important context because Roth IRAs do share some characteristics with qualified plans and are often grouped together with them in discussions about tax-advantaged retirement accounts.
Understanding Qualified Retirement Plans
Before we can fully grasp where Roth IRAs fit in, we need to understand what makes a retirement plan “qualified” in the first place.
What Defines a Qualified Retirement Plan?
The Internal Revenue Service (IRS) sets certain rules for qualified retirement plans under Section 401(a) of the Internal Revenue Code. These rules must also be followed by the Employee Retirement Income Security Act of 1974 (ERISA). Here are the key requirements:
- Employer-Sponsored: The plan must be established and maintained by an employer.
- Non-Discrimination Rules: The plan must comply with rules ensuring fair treatment of all employees.
- Contribution Limits: The plan must adhere to specific contribution limits set by the IRS.
- Required Minimum Distributions: The plan must follow rules about when participants must begin withdrawing funds.
Common examples of qualified retirement plans include:
- 401(k) plans
- 403(b) plans
- Traditional pension plans (defined benefit plans)
- 457(b) plans
- Thrift savings plans
- Savings Incentive Match Plans for Employees (SIMPLE)
- Employee stock ownership plans
These plans typically offer tax-deferred growth, meaning you don’t pay taxes on your contributions or earnings until you withdraw the money in retirement.
Why Roth IRAs Are Not Technically Qualified Plans
Roth IRAs fall outside the technical definition of qualified retirement plans for several important reasons:
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Individual vs. Setting up a qualified plan: Employers set up qualified plans, but individuals open Roth IRAs 1.
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ERISA Compliance: Qualified plans must comply with ERISA regulations, but Roth IRAs are not subject to these same requirements.
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Tax Treatment: Qualified plans often use pre-tax contributions, while Roth IRAs use after-tax dollars.
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Required Minimum Distributions (RMDs): Qualified plans require minimum distributions beginning at age 73 (or 75 for people turning 74 after December 31, 2032), whereas original Roth IRA owners don’t have to take RMDs during their lifetime.
Where Confusion Arises: Qualified Distributions vs. Qualified Plans
A part of the confusion comes from the fact that “qualified” is used in two different ways:
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Qualified Plans: Refers to employer-sponsored retirement plans meeting specific IRS requirements.
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Qualified Distributions: Refers to withdrawals from a Roth IRA that are both tax-free and penalty-free.
A “qualified distribution” from a Roth IRA must satisfy two requirements:
- The account has been open for at least 5 years (the five-year rule)
- The withdrawal is made for an IRS-approved reason, such as:
- The account owner is at least 59½ years old
- The owner becomes disabled
- The distribution goes to a beneficiary after the owner’s death
- The withdrawal (up to $10,000 lifetime limit) is for a first-time home purchase
Are Roth IRAs Non-Qualified Plans?
You might wonder if Roth IRAs are considered “non-qualified” plans instead. The answer is also no, at least not in the typical sense of the term.
Non-qualified plans are typically employer-sponsored arrangements that don’t meet the qualification requirements of the IRS. These include deferred compensation plans, executive bonus plans, and split-dollar life insurance plans. They’re often used to provide additional benefits to key employees or executives.
Roth IRAs don’t fit neatly into this category either. They’re individual retirement arrangements with their own specific tax treatment and regulatory framework.
The Tax Advantage Position of Roth IRAs
While not technically “qualified,” Roth IRAs do offer significant tax advantages that make them valuable retirement planning tools:
- After-Tax Contributions: You pay taxes on your contributions upfront.
- Tax-Free Growth: Your investments grow tax-free within the account.
- Tax-Free Qualified Withdrawals: You pay no taxes on qualified distributions in retirement.
- No Required Minimum Distributions: Original account owners don’t have to take RMDs during their lifetime.
Comparing Roth IRAs and Qualified Plans
| Feature | Roth IRA | Qualified Plans (e.g., 401(k)) |
|---|---|---|
| Established by | Individual | Employer |
| Contribution Limit (2024) | $7,000 ($8,000 if 50+) | $23,000 ($30,500 if 50+) |
| Tax Treatment | After-tax contributions, tax-free withdrawals | Pre-tax contributions, taxable withdrawals |
| Income Eligibility | Limited by income | Not limited by income |
| Required Minimum Distributions | None for original owner | Required at age 73 (75 after 2032) |
| Early Withdrawal | Contributions can be withdrawn tax and penalty-free | 10% penalty plus taxes on early withdrawals |
Can You Have Both a Roth IRA and a Qualified Plan?
Absolutely! There’s nothing stopping you from contributing to both a Roth IRA and a qualified retirement plan like a 401(k) in the same year. In fact, many financial advisors recommend this strategy to diversify your tax treatment in retirement.
To put money into a Roth IRA, the only rule is that your income must be below certain levels. For 2024, those limits are:
- Single or Head of Household: Full contribution below $146,000, phased out until $161,000
- Married Filing Jointly: Full contribution below $230,000, phased out until $240,000
- Married Filing Separately: Partial contribution below $10,000, no contribution at $10,000+
Why This Classification Matters
You might be wondering why all this technical jargon matters. Here’s why understanding the distinction is important:
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Tax Planning: Knowing how different accounts are taxed helps you optimize your retirement income strategy.
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Contribution Strategies: Understanding the different limits and rules allows you to maximize your retirement savings.
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Withdrawal Planning: Different account types have different rules for when and how you can access your money.
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Estate Planning: The rules governing how retirement accounts pass to heirs differ between account types.
The Bottom Line
While a Roth IRA is not technically a qualified retirement plan according to the IRS definition, it’s a tax-advantaged retirement account that offers unique benefits that complement qualified plans. The distinction mostly matters for understanding the different rules that apply to each type of account.
For most everyday savers, the important thing to remember is that both Roth IRAs and qualified plans like 401(k)s offer valuable tax advantages that can help you build your nest egg for retirement. Using them together as part of a comprehensive retirement strategy can give you more flexibility and potentially lower your overall tax burden in retirement.
Whether you’re just starting to save or looking to optimize your existing retirement accounts, understanding these distinctions can help you make more informed decisions about your financial future.
Have you been confused about the status of your Roth IRA? Did this article clear things up for you? We’d love to hear your thoughts and questions in the comments below!
Traditional IRAs
Traditional IRAs are savings plans that allow you the benefit of tax-advantaged growth. Also, investors can usually get a tax break as long as their income doesn’t go over certain levels. These levels depend on how they file their taxes and whether they or their spouse have a qualified retirement plan at work.
For example, a single account owner’s contribution is fully deductible in 2024 if their income–specifically, their modified adjusted gross income (MAGI)–is $77,000 or less. The portion that’s deductible declines the higher their MAGi is between $77,000 and $87,000. No deduction is permitted when MAGI is $87,000 or higher. These limits increase to $79,000 and $89,000 for 2025.
Such restrictions apply only to the deductibility of contributions, not to eligibility to contribute. You can put in as much as you want, as long as you don’t go over the annual limit, which is $8,000 for people 50 and older and $7,500 for people younger than 50 in 2024. The only restriction is that you cannot contribute more than your earned income. These limits do not increase for 2025.
Taxes must be paid on distributions, which you are required to start taking at age 73, even if you havent retired yet. These withdrawals are called required minimum distributions (RMDs), and the amount is determined by an IRS formula involving your age and your account balance.
Here are the starting ages for RMDs:
- 70 ½ if you were born before July 1, 1949
- 72 if you were born between July 1, 1949, and December 31, 1950
- 73 if you were born Jan. 1, 1951 through December 31, 1959.
- 75 if you were born in 1960 or later
If you withdraw any funds before you turn 59½, you will be subject to a 10% early withdrawal penalty in addition to the usual requirement of paying income tax on the amount you take.
The SECURE Act 2. 0 of 2022 expands access to retirement savings, beginning in 2024. Participants can access up to $1,000 annually from retirement savings for emergency personal or family expenses without paying the 10% early withdrawal penalties.
IRA plan providers allow holders to designate beneficiaries, and some plan holders allow beneficiaries for multiple generations. Traditional IRAs are good for people who are in a high tax bracket now but expect to be in a lower tax bracket when they retire because they let people invest without paying taxes on the money right away.
What Are the Contribution Limits for a 401(k) Plan?
For 2024, $23,000. If you are 50 or older, you can make a catch-up contribution of $7,500. For 2025, the limit increases to $23,500, but the catch-up contribution remains $7,500. Beginning after Dec. 31, 2024, the SECURE Act 2.0 substantially increases catch-up limits for 401(k) plan participants aged 60 to 63 to the greater of $10,000 or 150% of the “standard” catch-up amount for that year.
What’s a qualified distribution from a Roth IRA?
FAQ
How do I know if my IRA is qualified or nonqualified?
If you purchase it as an investment within your qualified employer-sponsored retirement plan or in an IRA, it’s qualified. If you buy it on your own with after-tax money, it’s nonqualified.
Do I have to report my Roth IRA on my tax return?
Roth IRAs. A Roth IRA differs from a traditional IRA in several ways. Contributions to a Roth IRA aren’t deductible (and you don’t report the contributions on your tax return), but qualified distributions or distributions that are a return of contributions aren’t subject to tax.
What type of account is a Roth IRA considered?
A Roth IRA is a type of tax-advantaged individual retirement account (IRA) where contributions are made with money that has already been taxed, and qualified withdrawals made in retirement are tax-free.
What does the IRS consider a qualified plan?
A qualified plan refers to employer-sponsored retirement plans that satisfy requirements in the Internal Revenue Code for receiving tax-deferred treatment. Most retirement plans offered by employers qualify including defined contribution plans like 401k plans and defined benefit plans like pensions.
Is a Roth IRA a qualified account?
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA. You cannot deduct contributions to a Roth IRA. If you satisfy the requirements, qualified distributions are tax-free. You can make contributions to your Roth IRA after you reach age 70 ½. Is an IRA a qualified account?.
Is a Roth IRA qualified or nonqualified?
Savers often encounter the terms “qualified” and “nonqualified” and wonder where their accounts fit. This is especially true for Roth Individual Retirement Accounts (IRAs), which are one of a kind when it comes to retirement. Understanding the classification of a Roth IRA is important for its tax implications and operational rules.
Is a Roth IRA considered a qualified plan?
For instance, the plans must be offered to all eligible employees and cannot disproportionately favor highly compensated employees. A Roth IRA is not considered a “qualified plan” because these plans are established by employers, whereas an IRA is an account established by an individual.
Is a Roth IRA distribution qualified?
A distribution also is qualified when taken as a series of equal periodic payments. A Roth IRA-qualified distribution includes a withdrawal of up to $10,000 if the withdrawal is for the purchase of a first home. However, any of the above distributions must have been made from a Roth IRA for at least five years.
Are IRAS a qualified retirement plan?
Individual retirement accounts (IRAs) are not qualified plans because they are not set up by an employer and therefore don’t fall under ERISA rules. They do, however, have special tax breaks for savers. 1 What Is a Qualified Retirement Plan?
What is a qualified account?
Qualified accounts rate special treatment under the tax rules to provide tax-advantaged savings or growth. Qualified account types include 401 (k) accounts, SEP IRAs, and traditional and Roth IRAs. Any account — such as a bank savings account, mutual fund or brokerage account — not set up as a qualified account is a non-qualified account.