Retirement Plans & Tax Planning Basics

Why this topic matters

Retirement accounts are the most common tax-planning tool for individuals. Taxation and Regulation (REG) tests contribution rules, deductibility, taxation of distributions, required minimum distributions, and penalties — much of it updated by the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022. Figures are for 2026 unless stated.

Types of plans

Plan	Key features
Defined benefit plan	The employer promises a specified benefit at retirement (for example, based on salary and years of service). The employer bears the investment risk and must fund the plan actuarially.
Defined contribution plan	Contributions are defined; the benefit depends on the account balance. The employee bears the investment risk. Includes 401(k), 403(b) (nonprofits and schools), 457(b) (governments), profit-sharing, and money purchase plans.
Simplified employee pension (SEP)	Employer-only contributions to employees' individual retirement accounts (IRAs), as a uniform percentage of compensation (up to 25%, subject to the annual dollar cap); popular with the self-employed
Savings Incentive Match Plan for Employees (SIMPLE)	For employers with 100 or fewer employees; employee deferrals plus a required employer match or nonelective contribution

Qualified plan requirements

• Nondiscrimination — cannot favor highly compensated employees.
• Minimum participation (age 21 and one year of service at most, with part-time worker rules) and minimum coverage.
• Vesting: employee contributions are always 100% vested; employer contributions vest under a 3-year cliff or a 2-to-6-year graded schedule for defined contribution plans.
• Benefits of qualification: employer deducts contributions now; employees are taxed only on distribution; earnings grow tax-deferred.

Contribution limits (2026)

Account	Limit	Catch-up
401(k), 403(b), 457(b) employee deferrals	$24,500	Age 50+: $8,000; ages 60–63: $11,250. From 2026, catch-up contributions by higher earners must be made as Roth contributions.
Traditional and Roth IRA (combined)	$7,500, or earned compensation if less	Age 50+: $1,100 (indexed)
Health savings account (HSA) (not retirement, but similar)	$4,400 self-only / $8,750 family	Age 55+: $1,000

IRA contributions for a year can be made until the return due date (April 15), not including extensions. A non-working spouse can contribute to a spousal IRA based on the working spouse's compensation if they file jointly.

Traditional versus Roth

	Traditional IRA	Roth IRA
Contributions	Deductible — but the deduction phases out if the taxpayer (or spouse) is an active participant in an employer plan and modified adjusted gross income (AGI) exceeds indexed thresholds	Never deductible; the ability to contribute phases out at higher modified AGI
Growth	Tax-deferred	Tax-free if distributions are qualified
Distributions	Taxable as ordinary income (except any nondeductible basis, recovered pro rata)	Qualified distributions are tax-free: account open at least 5 years and the owner is 59½, disabled, deceased, or a first-time homebuyer ($10,000 lifetime)
Ordering of Roth distributions	—	Contributions first (always tax- and penalty-free), then conversions, then earnings
Required minimum distributions	Yes	None during the owner's life

Roth conversions: any traditional IRA can be converted regardless of income; the converted pre-tax amount is taxable (not subject to the 10% penalty). Recharacterizing a conversion is no longer allowed. The pro rata rule treats all traditional IRAs as one when a taxpayer has both deductible and nondeductible contributions.

Early distributions — the 10% penalty

Distributions before age 59½ are subject to a 10% additional tax (25% for SIMPLE IRA distributions in the first 2 years), unless an exception applies:

Exception	IRA	Qualified plan (401(k))
Death or disability	✓	✓
Substantially equal periodic payments	✓	✓
Unreimbursed medical expenses above 7.5% of AGI	✓	✓
Birth or adoption (up to $5,000 per child)	✓	✓
Emergency personal expense (up to $1,000 per year)	✓	✓
Qualified higher education expenses	✓	✗
First-time home purchase ($10,000 lifetime)	✓	✗
Health insurance premiums while unemployed	✓	✗
Separation from service in or after the year the employee turns 55	✗	✓
Qualified domestic relations order payments	✗	✓

Required minimum distributions

• Start at age 73 for people born 1951–1959, and 75 for those born 1960 or later. The first distribution may be delayed until April 1 of the following year (then two are taken that year).
• Employees still working (and not 5% owners) may delay distributions from their current employer's plan until retirement.
• Penalty for missed distributions: 25% of the shortfall, reduced to 10% if corrected promptly.
• Roth IRAs and, from 2024, Roth 401(k) accounts have no lifetime required distributions.
• Inherited accounts: most non-spouse beneficiaries must empty the account within 10 years; eligible designated beneficiaries (surviving spouse, minor child, disabled or chronically ill persons, those not more than 10 years younger) may stretch distributions.
• Qualified charitable distributions: IRA owners aged 70½ or older may transfer up to an indexed annual amount directly to charity, excluded from income and counting toward required distributions.

Rollovers

• Direct (trustee-to-trustee) rollovers are unlimited and have no withholding.
• Indirect (60-day) rollovers: funds must be redeposited within 60 days; only one IRA-to-IRA indirect rollover per 12 months. Distributions from employer plans paid to the employee have 20% mandatory withholding, which must be made up from other funds to roll over the full amount.
• Unused Section 529 education savings may be rolled into the beneficiary's Roth IRA (lifetime limit $35,000; account open 15+ years; subject to annual IRA limits).

Planning basics

• Traditional accounts favor those expecting a lower tax rate in retirement; Roth accounts favor those expecting a higher rate.
• Employer matching contributions are an immediate return — contribute at least enough to get the full match.
• New under the One Big Beautiful Bill Act (OBBBA): "Trump accounts" — tax-advantaged accounts for children, with a federal $1,000 seed deposit for babies born 2025–2028 (contributions begin in July 2026).

How it is tested

• Distinguish defined benefit and defined contribution plans.
• Determine whether an IRA contribution is deductible or a Roth contribution allowed.
• Decide whether a distribution is taxable and subject to the 10% penalty.
• Apply required distribution ages and rollover rules.