¹ Most qualified retirement plans provide deduction or deferral treatment for contributions. However, certain other retirement plans (such as Roth and nondeductible traditional IRAs) are funded with after-tax dollars.

² Other types of deferred-compensation arrangements also exist, both qualified and nonqualified (e.g., cash-balance plans, stock-bonus plans, incentive stock options and nonqualified plans). This article discusses only the most commonly encountered account-balance plans.

³ Annual contribution limits impose a ceiling on the amount that may be contributed to an individual’s account. For example, in 2007, no more than $4,000 may be contributed to an IRA for a taxpayer under age 50 and no more than $15,500 may be set aside in a Sec. 457 account for a taxpayer under age 50; see Secs. 219(b)(1) and 457(e)(15)(A), respectively. The Pension Protection Act of 2006 (PPA ’06) indexes IRA and Roth IRA contribution ceilings, beginning after 2006. Further, the PPA ’06 repeals the sunset provisions in the Economic Growth and Tax Relief Act of 2001 relating to increased contribution limits on numerous retirement plans. The higher ceilings are now permanent.

⁴ The 2007 contribution limit is $15,500 for a taxpayer under age 50 and $20,500 for a taxpayer age 50 or older; see Sec. 402(g)(1).

⁵ Technically, Sec. 457 plans are nonqualified deferred-compensation arrangements, in that they are not listed in the Code as a type of qualified plan. (In general, a qualified plan is an employee trust arrangement described in Sec. 401(a) that is exempt from tax under Sec. 501(a).) However, Sec. 457 plans increasingly share characteristics similar to qualified retirement plans (e.g., plan contributions are not subject to tax, asset growth is tax-deferred until distribution and the annual contribution ceiling is similar to that for Secs. 401(k) and 403(b) plans).

⁶ See Sec. 408(k).

⁷ See Secs. 404(h)(1), 408(j) and 415(c)(1).

⁸ See Sec. 219(a). A spousal IRA may be established by a spouse for his or her nonemployed spouse, under Sec. 219(c).

⁹ See Sec. 219(b)(1), (c) and (g). 

¹⁰ See Sec. 219(g)(1) and (2).

¹¹ See Secs. 219(g)(2) and (3) and 408A(c)(3)(A). Under the PPA ’06, the income limits for Roth IRA contributions are indexed for tax years after 2006.

¹² See Sec. 408A(c) and (d). For a nondeductible traditional IRA, only the earnings part of the distribution is taxable using a Sec. 72 annuity-type calculation. A traditional IRA may in some cases be converted to a Roth IRA; see Sec. 408A(c)(3)(B) and (c)(6).

¹³ See Sec. 408A(c)(4), (c)(5) and (d).

¹⁴ Under a transition rule, it is possible to use both an averaging treatment and beneficial capital gain rates in calculating the related tax liability on the distribution. To be eligible, a taxpayer must have reached age 50 before 1986 (i.e., born before 1936); see P.L. 99-514, Section 1122.

¹⁵ If a taxpayer receives distributions from a retirement account that was funded with after-tax contributions (i.e., a nondeductible traditional or Roth IRA), a portion or all of the distributions may not be taxable. In the case of a nondeductible traditional IRA, only the portion of the distribution that is not a return of basis is subject to tax as ordinary income. In the case of a Roth IRA, no distributions are taxable if certain holding-period requirements are met; see Sec. 408A(d)(1) and (2).

¹⁶ Qualified-retirement-account balances that are transferred (i.e., rolled over) into a different qualified retirement account may not be subject to tax on the transfer; see Secs. 402(c) and 408(d)(3).

¹⁷ Employers often impose such rules to ensure an employee will have assets available during retirement. In general, a taxpayer can only receive distributions from one of these plans on death, disability, severance from employment, after a stated period of time or on reaching age 59½. Sec. 401(k) and other employer plans may allow hardship withdrawals, although they are subject to penalty. Qualifying as a hardship can be complicated, but basically it is defined as an immediate and heavy financial need of the employee that can only be met by a distribution. Pursuant to the PPA ’06, the IRS has been instructed to revise the regulations on hardship withdrawals to expand their scope.

¹⁸ See Sec. 72(t)(2).

¹⁹ Disability for these purposes is defined in Sec. 72(m)(7) as the inability to “engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.”

²⁰ Rev. Rul. 2002-62, 2002-2 CB 710, provides three methods that may be used to compute SEPPs: the RMD method, the fixed amortization method and the fixed annuitization method. To avoid penalties and interest, once a SEPP plan is adopted, distributions must continue for five years or until the taxpayer reaches age 59½, whichever comes first.

²¹ The taxpayer does not have to retire permanently. Instead, the exception applies when the taxpayer separates from service from the company that sponsored the plan from which the distributions are made.

²² A first-time homebuyer is defined as any taxpayer (or spouse) who has not owned a principal residence during the two-year period preceding the date of the acquisition, under Sec. 72(t)(8)(D).

²³ This requirement relates to so-called “RMDs,” which generally must begin by this age for most qualified retirement plans. A discussion of RMDs is beyond the scope of this article; see Secs. 401(a)(9), 403(b)(10), 408(a)(6) and (b)(3), 457(d)(2) and 4974(b).

²⁴ Pursuant to the PPA ’06, the IRS has been instructed to revise the regulations on withdrawals related to unforeseeable emergencies, so that their scope is expanded.