Is an IRA a Qualified Plan?

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.

Traditional IRAs

Traditional IRAs are savings plans that allow you the benefit of tax-advantaged growth. Also, investors are commonly allowed a tax write-off unless their income exceeds specified levels that vary, depending on their tax-filing status, 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.

Such restrictions apply only to the deductibility of contributions, not to eligibility to contribute. You can contribute as much as you like up to the annual contribution limit–$7,000 in 2024 if you are under age 50, and $8,000 if you are 50 or older. The only restriction is that you cannot contribute more than your earned income.

Taxes must be paid on distributions, which you are required to start taking at age 73, even if you haven’t 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.

IRA plan providers allow holders to designate beneficiaries, and some plan holders allow beneficiaries for multiple generations. Because traditional IRAs allow individuals to invest on a tax-deferred basis, they are suitable for people who are in a high tax bracket but anticipate being in a lower one at retirement.

Roth IRAs

Roth IRAs require that investors pay tax first on contributions and do not allow for a tax write-off. The advantage comes when you retire, and no tax is assessed on distributions. You are not taxed on any of the money that your income earns over the years it sits in your Roth account if the account is at least five years old and you are at least 59 ½ years old. You can take out your contributions–in contrast to earnings on them–at any time, at any age, free of tax and penalty.

Roth IRAs do not have RMDs or a requirement that you start taking distributions. If you can afford to hold the funds, they can continue to grow tax-free and can be passed to your heirs. However, heirs will be required to take taxable distributions.

As Roth IRAs allow individuals to invest on a tax-free basis, they are best suited to individuals who are in a low tax bracket but anticipate being in a higher one at retirement. There are income limitations on who is permitted to contribute to a Roth IRA.

Those with higher incomes can only open one by rolling over traditional IRA or 401(k) money, a process called opening a backdoor Roth IRA. If you do this, you will have to pay taxes with that year’s return on deductible contributions and all earnings. One exception: Those who have a Roth 401(k) can roll it over into a Roth IRA without the tax requirement.

Qualified Retirement Plans

Some employers offer defined-contribution or defined-benefit-qualified retirement plans. In the private sector, defined-contribution plans such as 401(k)s have largely replaced defined-benefit plans or pensions as the predominant model.

Employers receive incentives from the U.S. government to create these plans under ERISA rules. Beginning in 2025, the SECURE Act 2.0 requires employers to automatically enroll eligible employees in new 401(k) or 403(b) plans with a participation amount of at least 3% but no more than 10%. The contribution increases to the rate of 1% per year, up to a minimum of 10% and a maximum of 15%.

The Bottom Line

A qualified retirement plan is a retirement plan that is only offered by an employer and qualifies for tax breaks. By its definition, a traditional IRA is not a qualified retirement plan as it is not offered by employers, unlike 401(k)s, SEP, and SIMPLE IRAs, which make them qualified retirement plans. Traditional IRAs, however, do share many of the same features and benefits as qualified retirement plans, which individuals can use to save for retirement, either together with qualified retirement plans or on their own.