Retirement Plans

The whole unit on one sheet: IRAs, Solo 401(k)s, qualified employer plans, nonqualified arrangements, and every dollar figure the exam loves to swap.

The One-Liners That Win Points

• Traditional Individual Retirement Account (IRA): deductible contributions (income permitting), tax-deferred growth, distributions taxed as ordinary income (already-taxed, non-deductible contributions are recovered as basis, not taxed again).
• Roth IRA: after-tax contributions (never deductible), qualified distributions completely tax-free, and no Required Minimum Distributions (RMDs) for the original owner.
• Deductibility, not eligibility, phases out for the Traditional IRA; anyone with earned income can still contribute (non-deductible if over the ceiling).
• Roth contributions have income limits; Roth conversions do not. Any taxpayer can convert Traditional dollars to Roth regardless of income.
• Solo 401(k) stacks two buckets (employee elective deferral + employer profit-sharing) so the self-employed save far past IRA caps.
• Qualified plans (401(k), 403(b)) get an immediate employer deduction, ERISA protection, and creditor protection, but cannot cherry-pick which employees to cover.
• Nonqualified plans can discriminate (favor key executives) but the benefit is an unsecured promise exposed to the employer's creditors.
• 457(b) plans have no 10% early-withdrawal penalty on regular deferrals at any age (rolled-in money from other plan types keeps its source penalty exposure), and their limit is separate from 401(k)/403(b), so an eligible worker can max both.
• 403(b) plans invest only in mutual funds and annuity contracts, never individual stocks or bonds.
• Plan loans are allowed from 401(k) and Solo 401(k) plans; IRAs never permit loans (an IRA loan is a taxable distribution).

Numbers to Lock In

Top Gotchas

• Deductibility phases out, not the right to contribute. Above the Traditional IRA ceiling a taxpayer still makes a non-deductible contribution (basis tracked on the non-deductible-contribution form).
• The pro-rata rule applies to conversions. If a client holds pre-tax and after-tax IRA dollars, each conversion is a proportional slice of both.
• The elective-deferral cap and the total-contribution cap are separate. The $72,000 total includes employer matching and profit-sharing on top of the employee's $24,500.
• 457(b) is the no-penalty plan. If someone leaves a job before age 59.5 and taps funds penalty-free, the answer is a 457(b).
• 457(b) limits are independent of 401(k)/403(b), so a government employee could defer $24,500 into a 403(b) AND $24,500 into a 457(b) (totaling $49,000).
• A 403(b) is subject to ERISA only when the employer contributes; an employee-only 403(b) may be exempt.
• Executive bonus plans give the employer an immediate deduction and make the bonus currently taxable to the employee, the reverse of standard nonqualified deferred compensation.

Individual Retirement Accounts

• Contribution limit: $7,500 under 50, $8,600 at 50 or older, combined across all Traditional and Roth IRAs; cannot exceed earned income for the year.
• Spousal IRAs are permitted when filing jointly if combined earned income covers both contributions.
• Traditional: deductible depending on income and workplace-plan coverage; tax-deferred growth; ordinary-income distributions; RMDs at 73 (or 75); RMDs cannot be rolled over.
• Roth: after-tax in, tax-free qualified distributions (5-year clock plus age 59.5, death, disability, or first-time home purchase up to $10,000); principal withdrawable anytime tax- and penalty-free under ordering rules.
• Roth conversion (backdoor Roth): taxable portion of the converted amount taxed as ordinary income in the conversion year (non-deductible basis converts tax-free, pro-rata); the conversion itself doesn't trigger the 10% penalty, but a separate 5-year recapture rule can apply the penalty if the converted taxable funds are withdrawn early.

Solo 401(k)

• Built for self-employed individuals with no employees other than a spouse.
• Two buckets: employee elective deferral ($24,500, or $32,500 age 50+, or $35,750 age 60-63) plus employer profit-sharing (up to 20% of net self-employment income, the reduced rate for a self-employed owner with no W-2 employees); combined cap $72,000 ($80,000 age 50+, $83,250 age 60-63).
• Available as Traditional (pre-tax in, ordinary-income out) or Roth (after-tax in, tax-free out); the participant can split between them.
• Loans permitted (unlike IRAs); Traditional accounts have RMDs at 73 (75 for those born 1960+); Roth Solo 401(k) accounts have no RMDs (SECURE 2.0); 10% penalty before age 59.5.

Qualified Retirement Plans

• Qualified means the plan meets Internal Revenue Code rules to earn tax breaks: employer deduction, tax-deferred growth, and ERISA protection, in exchange for strict eligibility, nondiscrimination, vesting, and reporting rules.
• 401(k): employee elective deferrals (pre-tax or Roth) plus optional employer match; deferral cap $24,500 ($32,500 age 50+; $35,750 age 60-63), total cap $72,000 ($80,000 age 50+; $83,250 age 60-63); RMDs at 73 (75 for those born 1960+); designated Roth accounts (401(k) or 403(b)) have none; loans permitted.
• 403(b) (tax-sheltered annuity): the public-school and 501(c)(3)-nonprofit equivalent; same deferral limits; investments limited to mutual funds and annuity contracts; subject to ERISA only if the employer contributes.

Nonqualified Retirement Plans

• Core tradeoff: no IRS approval and free to discriminate, but generally outside ERISA, employer deduction deferred until the benefit is paid, and benefits are unsecured promises exposed to the employer's creditors.
• 457(b): government and nonprofit deferred compensation; same base deferral limit as 401(k) (age-based catch-up generally limited to governmental plans); no early-withdrawal penalty on regular deferrals at any age; limit is separate from 401(k)/403(b) (double deferrals possible).
• Executive bonus plan: employer pays the premium on a life policy the executive owns, treated as a taxable bonus (immediate employer deduction, currently taxable to the employee).
• Doctrines: constructive receipt sets when the employee is taxed (when received or freely available); economic benefit can trigger tax earlier if a current benefit exists; on employer insolvency, participants are general creditors with no priority.

One-Breath Recap

Individual Retirement Accounts split into Traditional (deductible in, ordinary income out, RMDs at 73 or 75) and Roth (after-tax in, tax-free out, no RMDs for the owner), with 2026 caps of $7,500 under 50 and $8,600 at 50-plus. Remember that only deductibility (not the right to contribute) phases out, while Roth conversions ignore income limits entirely.

The Solo 401(k) lets the self-employed stack a $24,500 employee deferral onto employer profit-sharing up to a $72,000 combined cap ($80,000 at 50+, $83,250 at 60-63), and it allows loans where IRAs never do.

Qualified employer plans (401(k) and 403(b)) hand the employer an immediate deduction plus ERISA and creditor protection but forbid cherry-picking employees, while nonqualified plans buy the freedom to favor executives at the cost of an unsecured promise.

Lock in the 457(b) twins (no early-withdrawal penalty at any age and a limit separate from 401(k)/403(b) that permits double deferrals), and this unit answers itself.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Retirement Plans unit for the complete lesson.