The main topics of this lesson are: Retirement Account History; 401k – 403B Plans; Roth 401k and IRAs Traditional IRAs and Rollover IRA SEP IRA; Other Plans and Inherited IRAs. For this lesson refer to the Study Notes and watch the video for a synopsis.
The purpose of this series of short videos is to provide a broad introduction to retirement accounts.
Although we will be touching on employer plans, such as pensions, 401Ks, and 403Bs, the primary focus
will be on IRA plans and the structure of those types of investment savings. We will briefly discuss the
history of IRA accounts, the different types of accounts, contributions to and distributions from IRA
accounts, the types of investments that are allowed, taxation of these accounts, selection of
beneficiaries and what happens at the death of the owner to these accounts.
Retirement Accounts – History
Retirement Accounts – or qualified retirement plans – are a means of saving for retirement,
usually tax free. Initially, employers provided pension plans for employees. However, as
business changed, union membership fell, and more people were self-employed or employed by
Congress, in 1974, created Individual Retirement Accounts to allow for all to save for retirement.
In 1978, Congress created 401K plans, which were intended to replace pension plans and, at the
time, shift some of the burden of providing retirement funds from the employer to the
employee, resulting in an economic stimulus.
Individually funded retirement plans were further enhanced in 1981 allowing for greater
contribution amounts and savings for spouses.
“Roth” IRAs were added in 1997 to lure after-tax contributions to retirement plans.
All retirement or qualified plans are designed to grow tax free after funding, but fund
distributions may be taxable depending on the nature of the distribution.
Defined Contribution & Defined Benefit Plans
A Defined Contribution Plan is a plan in which the employee makes contributions to a fund for
The Employer may or may not also contribute.
401K plans and 403B plans are Defined Contribution Plans.
A Defined Benefit Plan Pension is one in which the employee’s benefit is calculated based on
length of service and salary at retirement. Due to the high cost of this type of plan most
companies have discontinued them.
401k and 403B Plans
401K plans and their counterparts for non-profit businesses, 403B plans, are offered by many
403B plans offered by non-profits are essentially the same as 401K plans although there are
some technical differences for employers. However, they look and behave the same for
Contributions to these types of plans are tax deductible.
However, distributions from these plans are taxed and must be taken beginning at age 70.5.
Roth 401K Plans
Roth 401K plans, introduced in 2006, allow employees to make contributions after tax to their
Employer contributions (or matching contributions) are made to a traditional 401K plan giving
the employee in essence two 401K plans.
Distributions from the Roth 401K plans are not taxable and are not required, whereas
distributions from the regular 401K plan are taxable and again, must begin at age 70.5.
Traditional IRAs and Rollover IRA
Traditional IRAs are accounts with both before tax (funds that are not subject to tax in the year
that they are contributed) and after tax (funds that have had income tax paid on them when
they were earned) amounts in them.
Rollover IRAs historically contained funds that had been transferred or “rolled over” from an
employer sponsored plan, such as a 401K.
Current thinking is that the rollover IRA is outdated and no longer needed as the rules and
constraints surrounding funds rolled over from 401K plans have, for the most part, been
The one remaining constraint is that the owner is allowed only one rollover per year. There are
exceptions to this rule, however they are nuanced and require specific circumstances.
A Roth IRA is an IRA to which only after-tax contributions can be made.
Open only to taxpayers that earned income under a specific threshold, Roth IRAs are subject to
the same contribution limits as traditional IRAs.
Distributions are not required from Roth IRAs.
Intended to help the self-employed and small business, SEP IRAs allow for the owner to make
contributions for themselves based on the income of the business they own and operate.
Contributions are an adjustment to taxable income – they are pretax and have a significantly
higher limit than Traditional or Roth IRAs.
Employers may also make contributions to a SEP IRA for employees.
Other Plans and Inherited IRAs
There are other types of IRAs such as a Coverdell IRA for education savings. Intended to allow
for college funds to grow tax free and be paid out tax free, Coverdell IRA plans have been
replaced by 529 Savings plans offered by the states.
There are also SEP Simple plans which are an adjunct to SEP IRAs. However, these have now
been replaced by new small 401K accounts.
Inherited IRAs may be created when the owner of an IRA dies and a non-spouse is the
beneficiary of the account. This will be discussed in more detail in the beneficiary module of this
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