Is a 401K a 'Qualified' Retirement Plan?

A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages for the saver. It is named after a section of the U.S. Internal Revenue Code.

The employee who signs up for a 401(k) agrees to have a portion of their paycheck contributed into a retirement investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds and occasionally ETFs (Exchange Traded Funds).

Benefits of a 401 K are:

• Tax Deferral of Contributions and Investment Growth – Until Money is Withdrawn
• Contribution Limit for Employees – $20,500 annually
• Catch-up Contributions – Age 50 or older $6500 annually
• Distribution Without Penalty – Age 59 ½ or older (other options available)
• Required Minimum Distributions – Age 72 (IRS wants their money)
• Creditor Protection – Provide by the Employee Retirement Income Security Act of 1974

Depending on the plan, contributions will be invested into stocks, bonds or mutual fund options. The fund lineup is provided by the plan and the employee has the responsibility of choosing their investments. Typically, the option for advice or service is provided by the employer or plan administrator. They can dictate eligibility requirements for individual participants and vesting rules on employer contributions. 

Additional features including loan options, roth 401 K options, and after-tax contributions are also factors to be considered in the structure of a 401 K plan.

In the event you leave your employer, there are options to rollover your account to a new employer plan or an individual retirement account (IRA).  Keep in mind, a traditional 401 K is one of many qualified retirement plans that can be offered by employers.

Other tax qualified 401 k options examples are simple, safe harbor, and profit sharing 401 K plans. Even self-employed individuals have access to qualified retirement plans such as Simple IRA’s or SEP IRA’s, but these are out of the scope of this specific discussion on 401 K plans.