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.
• 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 at any age, 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); principal withdrawable anytime tax- and penalty-free under ordering rules.
• Roth conversion (backdoor Roth): converted amount taxed as ordinary income in the conversion year, no 10% penalty on a trustee-to-trustee transfer, restarts the 5-year clock.

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 25% of net self-employment income); combined cap $72,000 ($80,000 age 50+).
• 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; 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+), total cap $72,000 ($80,000 age 50+); RMDs at 73; Roth 401(k) has none; loans permitted.
• 403(b) (tax-sheltered annuity): the public-school and 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 deferral limit as 401(k); no early-withdrawal penalty 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, and 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, 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.