Quick Answer
Qualified plans meet Internal Revenue Code and Employee Retirement Income Security Act (ERISA) rules for tax-deferred growth, creditor protection, and non-discrimination; non-qualified plans skip those rules and can favor executives. Know defined benefit versus defined contribution, Traditional versus Roth Individual Retirement Accounts (IRAs), the 2026 limits, rollover mechanics, and how each distribution is taxed.
The whole unit on one sheet: which plan is which, the dollar limits, how money moves, and how it gets taxed on the way out.
Qualified vs. Non-Qualified
- Qualified: meets Internal Revenue Code and ERISA rules; employer contributions deductible when made; assets held in trust (creditor-protected); must be non-discriminatory; annual contribution limits apply; IRS approval required.
- Non-qualified: no IRS approval; employer deducts only when the employee reports the income; can discriminate (built for executives); assets sit in the employer's general account (exposed to creditors); no contribution limits.
Defined Benefit vs. Defined Contribution
- Defined benefit (pension): defines the benefit; employer bears investment risk; contributions are actuarially determined (no fixed amount); no individual accounts; insured by the Pension Benefit Guaranty Corporation (PBGC).
- Defined contribution: defines the contribution; employee bears investment risk; individual accounts; no PBGC. Types: 401(k), 403(b), profit-sharing, money purchase.
- PBGC covers defined benefit plans only, not 401(k)/403(b), and not government or church plans.
The One-Liners That Win Points
- Defined benefit = employer risk; defined contribution = employee risk. PBGC backstops only defined benefit.
- 457(b) has NO 10% early withdrawal penalty, ever. All other employer plans and IRAs do (with exceptions).
- 457(b) limit is separate from 401(k)/403(b): a government worker can max both in the same year.
- Age-55 separation-from-service exception applies to employer plans only, not IRAs.
- First-time home and higher-education penalty exceptions apply to IRAs only, not employer plans.
- SEP and SIMPLE IRAs vest immediately at 100%.
- Roth qualified distributions are tax-free; Roth IRAs have no lifetime required minimum distributions (RMDs).
- Non-qualified is not illegal or inferior; it just skips IRC/ERISA broad-based tax advantages.
- Money in pre-tax comes out ordinary income; money in after-tax comes out tax-free (basis).
Numbers to Lock In
| Item (2026) | Value |
|---|---|
| 401(k) / 403(b) / 457(b) elective deferral | $24,500 |
| Age 50+ catch-up (401(k)/403(b)/457(b)) | $8,000 |
| Age 60-63 super catch-up | $11,250 |
| Total annual addition (employee + employer) | $72,000 |
| Defined benefit max annual benefit | $290,000 (or 100% of top-3-year average pay) |
| SEP-IRA max contribution | lesser of $72,000 or 25% of comp |
| SEP compensation cap | $360,000 |
| SIMPLE IRA employee deferral | $17,000 (catch-up $4,000; super $5,250) |
| Traditional / Roth IRA limit | $7,500 (under 50); $8,600 (50+, $1,100 catch-up) |
| Roth catch-up trigger (prior FICA wages) | over $150,000 must use Roth basis |
| Coverdell ESA limit | $2,000 per beneficiary per year |
| 529 gift-tax reporting threshold | over $19,000/year per beneficiary |
| 529 five-year gift averaging | up to $95,000 ($190,000 married filing jointly) |
| 529-to-Roth rollover | 15-year account, contributions 5+ years old, $35,000 lifetime cap |
| RMD start age | 73 (by April 1 of the following year) |
| RMD shortfall penalty | 25% excise (10% if corrected within 2 years) |
| 60-day rollover / IRA-to-IRA frequency | 60 days / once per 12 months |
| Employer-plan mandatory withholding | 20% |
| Early withdrawal penalty (before 59½) | 10% (SIMPLE: 25% in first 2 years) |
Top Gotchas
- Actuarially determined means no fixed contribution; employees in a defined benefit plan do not choose investments.
- Employer matching does NOT count against the $24,500 deferral limit; it counts against the $72,000 total addition cap (defer $24,500 + $10,000 match = $34,500 used).
- Tax-exempt 457(b) cannot be rolled over and has no creditor protection; only governmental 457(b) is rollover-eligible and held in trust.
- 60-day rollover from an employer plan withholds 20%; to roll the full amount the participant must replace the withheld 20% from other funds within 60 days, or it becomes a taxable distribution.
- RMDs cannot be rolled over; delaying the first RMD to April 1 forces two distributions in one year.
- Anyone with earned income can contribute to a Traditional IRA; deductibility depends on income and employer-plan participation. Roth IRAs have income limits on the contribution itself.
- The Roth 5-year clock runs from January 1 of the first year any Roth contribution was made, not per contribution.
- Life insurance and collectibles are never permitted in an IRA; certain gold/silver/platinum coins meeting fineness standards are allowed.
- Pro-rata rule: you cannot cherry-pick after-tax dollars; the IRS pools all Traditional, SEP, and SIMPLE IRAs, so each withdrawal is proportionally taxable.
- Net unrealized appreciation (NUA): only for employer stock distributed in kind in a lump sum; basis is ordinary income, appreciation gets long-term capital gains rates.
- Incentive stock option (ISO) spread is not regular income at exercise but is an Alternative Minimum Tax (AMT) preference item; a non-qualified stock option (NQSO) spread is always ordinary income and gives the employer a deduction.
One-Breath Recap
Qualified plans meet Internal Revenue Code and ERISA rules and are creditor-protected; non-qualified plans skip those rules and favor executives. Defined benefit puts investment risk on the employer with a Pension Benefit Guaranty Corporation backstop, while defined contribution puts it on the employee. Nail the 2026 dollar limits, remember 457(b) has no 10% penalty, and taxation follows one line: pre-tax in means ordinary income out, after-tax in means tax-free out.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Retirement Plans and Tax-Advantaged Accounts unit for the complete lesson.