Qualified retirement plans are recognized by the IRS and meet requirements laid out in Section 401(a) of the U.S. tax code and ERISA guidelines. Most plans offered through your employer are qualified retirement plans and qualify for tax breaks.
A Roth IRA is not a qualified retirement plan, but there are similar tax advantages for those planning for retirement.
Retirement savers fund their Roth IRA account with after-tax dollars, which offer some attractive benefits:
To avoid penalties, retirement savers must wait after the age of 59 ½ to start making withdrawals and after a five year holding period. The exceptions for early withdrawal include first-time home purchase, college expenses, and birth or adoption expenses.
Roth IRA accounts are the most suitable for those who are in a lower tax bracket but anticipate being in a higher one upon retirement. Here are income range eligibility requirements for 2022 and 2023:
Roth IRA Income Requirements
2022
Filing Status |
Modified adjusted gross income (MAGI) |
Contribution Limit |
Single individuals |
< $129,000 |
$6,000 |
≥ $129,000 but < $144,000 |
Partial contribution (calculate) |
|
≥ $144,000 |
Not eligible |
|
Married (filing joint returns) |
< $204,000 |
$6,000 |
≥ $204,000 but < $214,000 |
Partial contribution (calculate) |
|
≥ $214,000 |
Not eligible |
|
Married (filing separately)1 |
Not eligible |
$6,000 |
< $10,000 |
Partial contribution (calculate) |
|
≥ $10,000 |
Not eligible |
2023
Filing Status |
Modified adjusted gross income (MAGI) |
Contribution Limit |
Single individuals |
< $138,000 |
$6,500 |
≥ $138,000 but < $153,000 |
Partial contribution (calculate) |
|
≥ $153,000 |
Not eligible |
|
Married (filing joint returns) |
< $218,000 |
$6,500 |
≥ $218,000 but < $228,000 |
Partial contribution (calculate) |
|
≥ $228,000 |
Not eligible |
|
Married (filing separately) * |
Not eligible |
$6,500 |
< $10,000 |
Partial contribution (calculate) |
|
≥ $10,000 |
Not eligible |
Source: https://www.fidelity.com/retirement-ira/contribution-limits-deadlines
Keep in mind that both traditional and Roth IRA accounts have annual contribution limits. Total contributions cannot exceed $6,500 or $7,500 if you are 50 and over.
Unlike non-qualified plans, qualified retirement plans must meet certain requirements to be eligible for tax benefits. Qualified plans have two primary types:
The types of funds usually held in a qualified retirement plan are mutual funds, bonds, stocks, real estate, and money market funds. Qualified retirement plans also dictate when distributions can be made, which is usually when the employee reaches retirement age, becomes disabled, when the plan is terminated, or when the employee dies and distributions go to the beneficiary.
Employers can benefit from tax breaks by making qualified retirement plan contributions for their employees. By reducing taxable income, certain plans can reduce an employee’s income tax liability. Similar to Roth IRAs, taking distributions before retirement age or taking distributions that don’t meet the requirements for early withdrawal can mean penalties and tax liabilities.
Planning and saving for retirement is a top priority for most savers and the tax benefits from qualified retirement plans are an added bonus. If you don’t have access to an employer-sponsored qualified retirement plan or choose not to, savers can still invest in tax-favored retirement accounts for those tax advantages. Work with a qualified retirement planner to make sure you properly prepare for your retirement years.
1Married (filing separately) can use the limits for single individuals if they have not lived with their spouse in the past year.