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Financial PlanningRetirement PlanningTaxation

Retirement Planning 101: What You Need to Know

Planning for retirement can be a daunting process for business owners and their employees. There is so much to understand and plan for – how much to save, what savings vehicles are best, when are distributions taxed, etc. Let’s start with the basics – the different types of retirement plans.

Qualified retirement plan:  A qualified retirement plan, sometimes called a qualified plan, is a program that allows employers to provide retirement income to its employees. For the employer, a qualified plan is exempt from taxation provided certain requirements are met. For example, a uniform formula must be applied to the employer’s contribution to ensure that employees receive their fair portion of the total.

Employers are able to deduct contributions made to the plan as a business expense. This tax deduction is one reason that employers find qualified retirement plans attractive. Employees will be taxed on their share of the contribution, but not until they receive distribution of the funds upon termination of employment or retirement.

For example, in 2011, Joe Employee received a $2,000 profit sharing contribution from his employer. Mr. Employee is not taxed on that income in 2011. However, when Mr. Employee takes distribution of the funds, such as retirement, he will be taxed at his current income tax rate.

Qualified plans are subject to minimum distribution rules.

Examples of qualified retirement plans include profit sharing plans, 401(k) plans and pension plans (e.g., money purchase pension plans).

Other retirement plans:  Individual retirement accounts (IRAs), Roth IRAs, SEPs and SIMPLE plans are other types of retirement plans. They can be established by either an employer or an individual. These plans are tax deductible at some point, depending on whether the initial contributions were tax deductible or not. In a Roth IRA, for example, contributions are made with after-tax income. Therefore, when funds are distributed in the future, they will not be taxed a second time. All other IRA distributions are typically taxable at the time of distribution because the original contributions were made with pre-tax dollars.

IRAs are also subject to minimum distribution rules.

In our next post, we’ll explain Minimum Distribution Rules which dictate when a qualified plan participant must begin withdrawing money from the plan. This is known as the “required beginning date,” and it is usually April 1 of the year following the year the plan participant turns 70 ½. More on that in our next blog!

In the meantime, if you have questions, please contact us at Synergetic Finance. We’d be happy to help you solve the retirement planning puzzle.

To your wealth,

President of Synergetic Finance




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