Retirement Plans & Tax Planning Basics

Plans

• Defined benefit: employer bears risk. Defined contribution (401(k), 403(b), 457(b)): employee bears risk.
• Simplified employee pension (SEP): employer-only contributions.

2026 limits

401(k) $24,500 (+ $8,000 at 50; + $11,250 at 60–63). Individual retirement account (IRA) $7,500 (+ $1,100). Contribute by April 15.

Traditional vs Roth

• Traditional: deductible (phase-out if active participant), taxed on withdrawal.
• Roth: not deductible; qualified = 5 years + 59½ / disability / death / first home → tax-free. Contributions come out first.
• Roth IRA and Roth 401(k): no lifetime required distributions.

10% early withdrawal penalty (before 59½)

• Both: death, disability, periodic payments, medical over 7.5%, birth/adoption $5,000, emergency $1,000.
• IRA only: education, first home ($10,000).
• Plan only: separation at 55+.

Required minimum distributions

Age 73 (born 1951–59) or 75 (born 1960+). Miss → 25% (10% if corrected). Inherited: 10-year rule for most.

Rollovers

60 days; one IRA-to-IRA indirect rollover per 12 months; 20% withholding on plan payouts to the employee.

Exam traps

• Roth IRA contributions phase out at higher incomes; Roth 401(k) contributions have no income limit.
• Excess IRA contributions cost a 6% excise tax every year until corrected.
• The 10% early withdrawal penalty is on top of regular income tax, not instead of it.
• Indirect rollover from a plan: 20% is withheld, so the taxpayer must make it up from other funds to roll over (and avoid tax on) the full amount.