The Law of the Market: Pension Plans


As I mentioned earlier in this column, the era of generous retirement plans offered by employers to their employees is, for most of us, a thing of the past. However, a few decades ago, the federal government attempted to fill this gap with:

Many types of tax-advantaged “qualified plans” such as 401(k) plans and the like); and

Tax-advantaged Individual Retirement Accounts (“IRAs”).

In this column, I will collectively refer to all of these many types of plans simply as “Plans”. For the reasons given below, if you are not already participating in a plan, it is quite possible that you should.

The above Plans are “tax-efficient” because, with a few exceptions:

The contributions you make to them in plan trusts are deductible from your federal taxable income;

The growth of these contributions in these trusts is exempt from tax; and

Although your withdrawals from these funds (called “distributions” in the plan world) are taxable, you’ll probably want to make them after you retire, when your federal income tax rate will likely be much lower than your income tax rate. before retirement. assess.

Choosing the best plan can be difficult; to make this choice wisely, you may need the help of an expert. I have a basic knowledge of blueprints, but I don’t give advice on them. But if you want, I can refer you to a Plan expert if you think it will be helpful. In the meantime, below is a list of the main plan types and, very briefly, some of the pros and cons of each that you might be interested in. In the next few columns, I’ll discuss some of these plans in more detail.

“Qualified plans” are plans that comply with the federal tax rules imposed under Section 401 of the Internal Revenue Code. There are seven main types of qualified plans under Section 401, and there are similar plans under other IRC provisions. The rules governing who can participate in these plans, the amounts participants can contribute to them on a deductible basis, the distributions participants get from them, and other rules governing their operation are complex, and the initial and ongoing costs of setting them up and their operation can be substantial. However, for employees of large companies (eg, those with more than 100 employees) and even for some small businesses and sole proprietors, they can generate better federal tax benefits than IRAs.

There are three main types of IRAs, namely (i) “basic” IRAs (sometimes called “traditional” or “contributory” IRAs); (ii) SEP-IRAs (i.e. “simplified employee retirement plans”) and (iii) SIMPLE IRAs (i.e. “retirement incentive plans”). savings for employees”). You can easily and inexpensively set up one of these IRAs through your bank or other financial institution. With certain exceptions, you can make deductible contributions to IRAS in 2022 as follows: (i) to a Basic IRA, $6,000 per year; (ii) to a SIMPLE IRA, $14,000; (iii) to a SEP-IRA, the lesser of $61,000 or 25% of your 2022 compensation.

So, for many readers of this column who are sole proprietors and for some who have a small number of employees, by far the best plan to set up and contribute will often be a SEP-IRA.

However, while you cannot deduct your contributions to any of the different types of federal retirement plans called “Roth” plans, you can withdraw your contributions to these plans tax-free, and Roth plans also have certain other advantages over non-Roth diets.

A link to a website that provides a great overview of qualified and IRA plans is: sep-ira-and-simple-ira.asp. This website will also give you links to IRS websites that explain the different types of plans.

John Cunningham is an attorney licensed to practice law in New Hampshire and Massachusetts. He is legal counsel for the law firm McLane Middleton, PA. Contact him at 856-7172 or [email protected] His website is To access all of his Law in the Marketplace columns, visit

Law in the Marketplace is a legal advice section. It airs weekly in the Sunday Business section. The author is a lawyer at Concord and is not a staff member of the Monitor.


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