A tax professionals guide to tax-deferred retirement plans

A recent survey found that employees fear retirement more than divorce or death. Anxiety about financial unpreparedness is resulting in many employees expecting to delay retirement. So employees can achieve their retirement goals without anxiety, there is an increased need for understanding retirement tax planning. To aid accountants as trusted financial advisors, this article explores many of the most common tax-deferred retirement plans and explains some of the associated planning considerations. 

Table of contents

1. Understanding qualified retirement plans
2.  
3. Roth accounts
4. Money purchase pension plans
5. IRAs and Roth IRAs
6. Simplified Employee Pensions
7. Savings Incentive Match Plans for Employees

Don't miss out on the latest tax news, updates, and information. 

Becker's tax team has the resources and courses you need to stay in-the-know! 

Visit the Tax Resource Center

Understanding qualified retirement plans 

Most plans offered by employers are qualified retirement plans covered under the Employee Retirement Security Income Act of 1974 (ERISA)¹. These plans not only offer tax-deferral advantages, ERISA and the Internal Revenue Code [IRC] protect the related assets from creditors under their anti-alienation rules. 

For example, if you had a major accident or someone got hurt on your property, and the injured party successfully sued for damages, the courts could not take any money in your ERISA retirement plans to satisfy the judgment. The security of this provision alone should be enough to incentivize employees to save for retirement using qualified retirement plans. 

Defined benefit plans 

There are two basic types of qualified retirement plans. The first is a defined benefit plan, or DB plan. Under a DB plan, the worker’s retirement benefits are computed using a pre-determined formula outlined in the plan document (e.g., a $200 monthly benefit for each year of service would equal a $6,000 monthly annuity if the worker completed 30 years of service). 

While there are some exceptions, defined benefit plans are generally funded with only employer contributions. The employer bears all the investment and longevity risks because a specifically defined benefit has been promised to the employee. These plans are usually more prevalent in government entities and unionized companies. 

As the employer makes contributions to the DB plan and the worker accrues the benefits, the employee does not pay taxes on any benefits earned (i.e., there is no constructive receipt of benefits). Once the employee retires and becomes eligible for the accrued benefit, they are taxed on the benefits as they receive them from the DB plan. The income received from these benefit payments is generally taxed as ordinary income but escapes Social Security and Medicare taxes. 

Benefits from defined benefit plans are subject to the mandatory required minimum distribution (RMD) rules. Under the current RMD rules, participants must begin taking their benefits the year after they turn age 73 or, if later, the year they retire (if the plan has a provision that allows this). Thus, even if the employee does not need the money, they are still required to take it from the plan, pay taxes on it, and lose the creditor protection provided under the anti-alienation rules. 

Defined contribution plans 

The second type of qualified retirement plan (and the most common) is a defined contribution plan, or DC plan. In DC plans, the employee’s benefits are determined by how much is contributed by the employee and employer plus investment returns, which are not taxed while in the plan. The employer is not obligated to provide a specific benefit amount. The employee is only entitled to their account balance. Consequently, when their account balance is gone, no remaining benefits are due. 

Defined contribution plans come in various forms— the most prevalent being 401(k) plans, 403(b) plans, and money purchase pension plans. 

Defined benefit plan or defined contribution plan 

The biggest differences between DB and DC plans are income security and assumption of risks. Defined benefit plans provide secure retirement income that is paid every month the retired employee lives (and can provide stable income to surviving spouses). Some DB plans allow for early retirement, disability benefits, and cost-of-living adjustments to help offset inflation. However, if the employer sponsoring the plan goes bankrupt and cannot continue to fund it, the plan will be turned over to the Pension Benefit Guaranty Corporation (PBGC) insurance trust fund, which could result in a reduction in promised benefits based on the PBGC’s maximum guarantees formulae. 

With a defined contribution plan, the retired employee is provided a savings balance at retirement and must figure out how to manage it for the rest of their life. Consequently, investment risk and longevity risk are borne by the employee in a DC plan versus the employer in a DB plan. Employees also generally benefit from expert investors in a DB plan who are employed to maximize investment returns. In a DC plan, the account is typically managed at the employee’s discretion (who may lack investing expertise). However, this can be beneficial if the employee is a good investor, and the DB plan alternative does not provide cost-of-living adjustments (i.e., the real-dollar annual benefits decline each year). 

Moreover, the employee gives up most control over their retirement benefits in a defined benefit plan. They can only access the benefits under the provisions of the plan (usually only at retirement), which generally require longer vesting periods with limited portability (i.e., can’t accrue additional benefits after changing jobs). Alternatively, defined contribution plans typically allow in-service hardship withdrawals in certain circumstances and may allow employees to access their savings through loans. In many instances, DC plans are portable and can be rolled over to qualified plans maintained by successor employers. 

Defined contribution plan #1: 401(k) and 403(b) plans 

Both 401(k) plans and 403(b) plans are very similar qualified retirement plans, as both plans allow the employee to contribute part of their salary (i.e., salary deferrals) to the plan. The employer may make contributions to the plan on the employee’s behalf (e.g., matching contributions, required contributions, profit sharing contributions, etc.). However, they generally have one key difference—who sponsors them. For-profit companies primarily sponsor 401(k) plans for their employees, while not-for-profit and governmental organizations sponsor 403(b) plans for their employees. 

In traditional 401(k) and 403(b) plans, the employee’s salary deferrals are contributed to the plan with pre-tax dollars. The employer reduces taxable wages reported on the employee’s W-2 by the amount of salary deferrals for the year (i.e., no income taxes are due on the salary deferrals). However, the employee must still pay Social Security and Medicare taxes on the wages. 

The amount of salary deferrals allowed to be made to a defined contribution plan is capped annually and indexed for inflation under the IRC. For 2025, employees under age 50 can contribute up to $23,500, and employees aged 50 and older can make catch-up contributions of $7,500 (increased to $11,250 if aged 60 to 63)². Employer contributions are not taxable to the employee when they are made to the plan. These contributions also escape Social Security and Medicare taxes. 

There is an annual combined employee and employer contribution limit under the IRC that is indexed for inflation. The limit for 2025 is $70,000. Catch-up contributions are generally excluded from this total contribution limit. All distributions from traditional qualified retirement plans are taxed using ordinary income tax rates. If distributions are made before the employee turns 59½ and do not qualify for an exception, they are generally subject to an additional excise tax of 10%. Traditional 401(k) and 403(b) plans are also subject to the same RMD rules as DB plans above. 

Defined contribution plan #2: Roth accounts 

Sponsors of 401(k) and 403(b) plans can also allow the employee to contribute to a Roth account, though these are not considered a qualified retirement plan. Under a Roth account, the employee makes after-tax contributions to the account (i.e., they pay income, Social Security, and Medicare taxes on the salary deferrals). 

Because employer contributions are not taxable income to the employee until they are withdrawn from the plan, no employer contributions are allowed to a Roth account. Employers may still make contributions when a Roth account exists, but such contributions must be placed in a pre-tax account to make sure they are taxed when they are distributed to the employee. The annual contribution limits discussed for traditional plans also apply to Roth accounts. If the employee has both types of accounts, the contributions must be aggregated to determine compliance with the annual limitations. 

Why choose a Roth account in retirement tax planning?

Roth accounts have two key advantages over traditional accounts, including qualified retirement plans. First, all distributions from Roth accounts, including untaxed investment income, are tax-free once the employee turns 59½ and at least five years have passed since the employee’s first contribution to their Roth account. 

If the employee withdraws money from their Roth account before turning age 59½ and does not qualify for an exception, the distribution is generally subject to the 10% additional excise tax. If a distribution is taken before five years have passed since the first contribution, any investment earnings will be taxed at ordinary income tax rates (and the 10% excise tax may apply if the employee is under age 59½). 

However, distributions in violation of the age 59½ rule and/or five-year rule may still escape taxation and penalties because the employee can withdraw their contributions (which were previously taxed) at any time without taxes and penalties, and, by law, distributions are deemed to come from contributions first. 

The second advantage is that Roth accounts are not subject to the RMD rules. Accordingly, the employee is not required to withdraw any money from a Roth account during their lifetime, and the money continues to earn tax-free investment income and retain protection from creditors. This is very important for employees who do not currently need the money. 

Choosing a 401(k) or 403(b) vs a Roth account 

Determining whether a traditional account or Roth account is advantageous for the employee from a financial perspective can be complex because it centers on trying to predict future income tax rates. If the employee expects to be in a lower income tax bracket when they retire, the traditional account is typically better because less taxes will be paid. 

However, if the employee expects to be in a higher tax bracket when they retire (especially if they plan on moving to a state that taxes retirement benefits), then the Roth account is better. Moreover, there is an asset protection consideration. With a Roth account, the employee will pay taxes upfront from accounts that are not afforded creditor protection under the anti-alienation rule, thus reducing their non-creditor-protected accounts. Consequently, their creditor-protected Roth account can grow more for longer (especially since they are not subject to the RMD rules). 

There is also a more practical consideration. With a Roth account, the employee is considered to have prepaid their taxes on future cash flows (i.e., the distributions). If the employee has enough cash flow to pay taxes currently and is concerned about having enough cash flow during retirement, a Roth account may be preferable to eliminate the anxiety and stress of having to pay taxes during retirement when the cost of living is uncertain.

Defined contribution plan #3: Money purchase pension plans 

Money purchase pension plans (MPPP) are another type of defined contribution plan and also a qualified retirement plan. A MPPP does not guarantee the employee a set amount at retirement. Instead MPPPs require employers to make predetermined fixed contributions to the plan on behalf of eligible employees. The employer is obligated to make these contributions on an annual basis as long as the plan is maintained, and an excise tax is charged if the employer does not satisfy the contribution requirement. 

The employee’s benefits are dependent upon the length of time they participate in the plan and the amount of money contributed by the employer plus investment income (investment decisions remain with the employee). However, unlike other DC plans, a MPPP must offer the option to receive distributions as a lifetime annuity (like a DB plan). Contributions are set by the MPPP but cannot exceed maximum amounts under the IRC.

For example, the MPPP may specify that the employer must contribute 5% of the employee’s pay into their account. For 2025, the maximum MPPP contribution for the employee is the lesser of either: 

1. 25% of the employee’s compensation 
2. $70,000 (adjusted annually for inflation). 

MPPPs can allow employee contributions, but Roth accounts are prohibited. Employer and employee contributions are deposited into the employee’s MPPP account tax free (i.e., no income taxes paid). Employer contributions escape Social Security and Medicare taxes. All contributions are invested at the employee’s discretion, and investment income is not taxed until the employee receives distributions. 

All MPPP distributions are taxed using ordinary income tax rates. If distributions are made before the employee turns 59½ and do not qualify for an exception, they are generally subject to an additional excise tax of 10%. MPPPs are also subject to the same RMD rules as 401(k), 403(b), and defined benefit plans above. 

Retirement tax planning with IRAs and Roth IRAs 

Individual Retirement Accounts (IRA) are not qualified retirement plans because they are not generally offered by employers (i.e., they are established by individuals). Consequently, they are not subject to ERISA and do not have the creditor protections afforded under the anti-alienation rules. However, many states have laws that protect IRAs from creditors, and federal bankruptcy law provides limited protections against creditors in the event of bankruptcy. 

IRAs

Under a traditional IRA, contributions are generally tax deductible on the individual’s personal tax return (i.e., contributions are made with pre-tax money). The contributions are invested at the individual’s discretion, and the related investment income is not taxed until it is withdrawn. 

For 2025, individuals are allowed to contribute up to the lesser of either:

1. 100% of compensation
2. $7,000, which increases to $8,000 for individuals aged 50 or older (these amounts are indexed annually for inflation). 

These limits may be further reduced if the individual or their spouse actively participates in a qualified retirement plan or tax-sheltered annuity. 

All distributions from traditional IRAs are taxed using ordinary income tax rates. If distributions are made before the employee turns 59½ and do not qualify for an exception, they are generally subject to an additional excise tax of 10%. IRAs are also subject to the same RMD rules as 401(k), 403(b), and DB plans above. 

Roth IRAs 

Individuals may also have Roth IRAs. These are very similar to Roth accounts in 401(k) and 403(b) plans. Individuals who contribute to a Roth IRA are not allowed to deduct the contributions on their tax return (i.e., they are after-tax contributions). The contributions are invested at the individual’s discretion. 

For 2025, Individuals are allowed to contribute up to the lesser of either: 

1. 100% of compensation
2. $7,000, which increases to $8,000 for individuals aged 50 or older (these amounts are indexed annually for inflation). 

These limits may be further reduced if the individual’s adjusted gross income (AGI) exceeds certain limits. If the individual has both traditional and Roth IRAs, the contributions must be aggregated to comply with this rule. 

Distributions from Roth IRAs are tax-free once the individual has turned 59½ and at least five years have passed since the individual’s first contribution to their Roth IRA. If the individual withdraws money from their Roth IRA before turning age 59½ and does not qualify for an exception, the distribution is generally subject to the 10% additional excise tax. If a distribution is taken before five years have passed since the first contribution, any investment earnings will be taxed at ordinary income tax rates (and the 10% excise tax may apply if the individual is under age 59½). 

However, distributions in violation of the age 59½ rule and/or five-year rule may still escape taxation because the individual can withdraw their contributions (which were previously taxed) at any time without taxes and penalties, and, by law, distributions are deemed to come from contributions first. Moreover, Roth IRAs are not subject to the RMD rules. 

Defined contribution plan #4: Simplified Employee Pensions 

Simplified Employee Pensions (SEP) are a type of defined contribution plan and is considered a qualified retirement plan. Technically covered under ERISA, SEPs are also exempt from most ERISA rules—including the anti-alienation rules. However, they may be afforded creditor protection under state and/or federal bankruptcy laws. 

Under a SEP, the employer establishes an IRA for each employee, where it makes contributions based on a predetermined formula. For 2025, the maximum SEP contribution per employee is the lesser of either:

1. 25% of the employee’s compensation without regard to the employer contribution
2. $70,000 (indexed annually for inflation). 

No employee contributions are allowed. Employer contributions are deposited into the employee’s IRA account tax free (i.e., no income taxes paid) and escape Social Security and Medicare taxes. All contributions are invested at the employee’s discretion, and investment income is not taxed until the employee receives distributions.

 All distributions from SEPs are taxed using ordinary income tax rates. If distributions are made before the employee turns 59½ and do not qualify for an exception, they are generally subject to an additional excise tax of 10%. SEPs are also subject to the same RMD rules as 401(k), 403(b), and defined benefit plans above. 

SEPs are ideal for sole proprietors or other small-business owners looking for an easy, cost-effective way to save for retirement. These IRA accounts serve as traditional IRA accounts for business owners and for their employees. SEPs can allow business owners to save more for retirement than traditional and Roth IRAs allow. The employer may receive a tax credit (up to $5,000 per year for 3 years) for the costs of starting a SEP. 

Solo 401(k)s

Alternatively, business owners with no employees can establish a Solo 401(k) to cover the owner and their spouse. Under a Solo 401(k), the employer can make both salary deferrals up to 100% of compensation or earned income and employer contributions. The contribution limits for salary deferrals and total combined contributions are the same as those discussed for regular 401(k)s above. 

Employer contributions are capped at 25% of compensation as defined by the plan, or for business owners, net earnings from self-employment after deducting one-half of the self-employment tax and the employer contributions made by the self-employed individual. While there are some other very nuanced exceptions beyond the scope of this article, including if the person is self-employed and covered under an employer plan at another job, Solo 401(k)s may enable small-business owners with no employees to save more for retirement versus a SEP. 

Defined contribution plan #5: Savings Incentive Match Plans for Employees 

Savings Incentive Match Plans for Employees (SIMPLE) are also qualified retirement plans established by employers using IRAs. These defined contribution plans are only available to employers 1) with 100 or fewer employees, and 2) who do not sponsor another qualified plan. They can be established using IRAs or 401(k) accounts. 

For 2025, qualified employees can make salary deferrals of up to $16,500 and catch-up contributions of $3,500 for employees aged 50 or older (increased to $5,250 for ages 60 to 63). These limits are adjusted annually for inflation. Only pre-tax salary deferrals can be made by employees—Roth accounts are prohibited. 

Employers are required to make contributions equal to either: 

1. A dollar-for-dollar match of up to 3% of the employee’s compensation (the employer can elect a lower percentage in not more than 2 out of any 5 years, but the lower percentage cannot be less than 1%)
2. A contribution of 2% of compensation for all eligible employees (whether they make salary deferrals or not). 

All contributions are deposited into the employee’s account tax free (i.e., no income taxes paid). Employer contributions escape Social Security and Medicare taxes. All contributions are invested at the employee’s discretion, and investment income is not taxed until the employee receives distributions. All distributions from SIMPLEs are taxed using ordinary income tax rates. If distributions are made before the employee turns 59½ and do not qualify for an exception, they are generally subject to an additional excise tax of 10%. SIMPLEs are also subject to the same RMD rules as 401(k), 403(b), and DB plans above. 

SIMPLEs provide a good alternative for small businesses who do not want the compliance and technical complexities that come with qualified retirement plans. Employees still benefit from the tax deferral benefits, plus instant vesting of employer contributions. The employer may receive a tax credit (up to $5,000 per year for 3 years) for the costs of starting a SIMPLE. 

IRAs are ideal for self-employed individuals who do not have access to qualified plans or do not want to incur the expense of maintaining a qualified plan. Employees who do not like the investment lineup in their employer’s qualified plan may also, within certain limits, establish an IRA to access more favorable investments (e.g., lower costs, higher returns, etc.). Additionally, IRAs are generally used when individuals roll over balances from other qualified plans due to termination of employment or retirement. Whether a traditional IRA or Roth IRA is better depends on future tax rates (see discussion above with Roth accounts in defined contribution plans).

Learn more about retirement tax planning with Becker

Becker offers a wide variety of CPE courses to help you learn more about the topics that matter most. To learn more about qualified retirement plans and similar topics, check out these tax CPE courses: 

• Tax Planning Strategies for Individuals
• Personal Financial Planning
• IRA Mastery
• Sources of Income in Retirement

Unlock unlimited CPE with a Prime Subscription

Becker makes it easy to meet your CPE requirements, gain new skills, and stay aware of critical updates and changes in the industry! 

With Prime, you can access over 1,700 courses for a full year and earn unlimited CPE credits. 

Choose Prime CPE