How is a qualified plan primarily defined?

A qualified plan is primarily defined as a tax-efficient way to save for retirement. These plans meet specific requirements set by the Internal Revenue Service (IRS) and the Employee Retirement Income Security Act (ERISA), which provide significant tax advantages. Contributions to qualified plans are often made on a pre-tax basis, which reduces the participant's taxable income in the year contributions are made. Additionally, the earnings on investments within the plan grow tax-deferred until withdrawals are made during retirement.

This tax efficiency encourages individuals to save for retirement, ensuring they have adequate funds when they retire. The benefits of qualified plans can extend to both employees and employers, as employers may also receive tax deductions for contributions made on behalf of their employees. Overall, the defining characteristics and benefits of qualified plans revolve around their ability to facilitate retirement savings efficiently from a tax perspective.