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A Practical User’s Guide to Qualified Accounts

George Grombacher September 15, 2022

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A Practical User's Guide to Qualified Accounts

Qualified accounts are the primary way we save for retirement but it wasn’t always that way.

In 1875, the American Express Company developed the first private pension in the United States. Prior to that, the military and government had been providing pensions since 1781. In 1935, Social Security was introduced and it evolved throughout the century. 


In 1978, the 401(k) was born. This qualified account grew in popularity and today, it’s replaced pensions as the primary vehicle Americans used to save for retirement. 


A pension is a type of defined benefit plan. 401(k)s are a type of defined contribution account. Defined benefit plans specify the amount of benefit (income) the participant will receive. Defined contributions plans specify only how much employers will contribute to the plan (if anything). 


One of the key differences is this: the bulk of responsibility for retirement security has shifted to you and I. We are responsible for saving and investing enough money to one day move away from full-time employment, and into retirement. 


Unfortunately, many Americans have neither accepted nor embraced that responsibility. The average American has $167,000 saved for retirement. That’s taking everyone into account; from Boomers to Gen Z. Later, I’ll share how much I think you should plan to save.  


It’s my goal to help you understand how qualified accounts work so you can become financially secure and one day retire. 


As a financial and 401(k) advisor, I’ve been helping people successfully use qualified accounts for over 20 years. I’m honored to be named to Investopedia’s list of the top 100 financial advisors many years running. 


Here’s what we’ll cover:


  • The benefits of qualified accounts

  • Types and rules around qualified accounts

  • How to think about qualified accounts

  • Roth versus traditional contributions

  • How much to save?


Let’s get started.


The benefits of qualified accounts


There are a lot of benefits to qualified accounts, ranging from tax benefits to potential employer contributions. Einstein famously called compound interest the eighth wonder of the world, and every type of qualified account provides this. 


Contributions can also be automated. This helps you to pay yourself first, which is the Golden Rule of personal finance. If you’re fortunate to work at a company that offers a 401(k), you can elect to have contributions deducted from your pay before they hit your bank account. You can also accomplish this by opening an IRA and setting up automatic contributions at the beginning of each month. 


In the absence of pensions, qualified accounts are your best option to prepare for retirement. 


Types and rules around qualified accounts


There are a lot of different qualified accounts. IRAs, Roth IRAs, 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs are the most common qualified accounts. Some accounts, like the 401(k), can only be offered by employers. Others, like IRAs, can be opened by anyone with earned income. 


There are a lot of rules around qualified accounts. It’s important to educate yourself on them, and to recognize things like contribution amounts can change yearly. Here are the key areas to be aware of:


  • Contribution amounts: There are limits to how much money you can contribute to qualified accounts each year. The IRS has a lot of helpful resources to stay up to date. 
  • Time horizon: These are designed for long-term savings, specifically for retirement. With some exceptions, you’re not supposed to take money out of these accounts before you turn 59 and a half. 
  • Investment options: Within 401(k)s, the most common investment options are mutual funds and ETFs. IRAs offer more flexibility and allow for most any type of investment. 


Though not overly complicated, it’s prudent to stay up to date with the rules for qualified accounts. 


How to think about qualified accounts


Unless you’re working for the government, military, or are fortunate enough to have a pension at your company, your qualified account is your go-to place for saving for retirement. 


Thinking about ourselves getting old is an abstract thing, but God-willing, we’ll all be old one day. With that in mind, we need to be putting money away for our future-selves. You’ve heard the saying, “The best time to plant a tree was 30 years ago. The next best time is today.” And certainly, if you’d started saving for retirement at 15, you’d be much better off than if you waited until 55. Either way, now is the time to be saving and investing for retirement. 


While investing in individual stocks is tempting, a diversified approach is the best approach to investing for retirement. You accomplish this through mutual funds and ETFs. It’s also important to pay attention to the fees and expenses of your investments and your investment accounts. You can learn about the expenses inside your 401(k) by obtaining the fee disclosure statement, and about the expenses of the investments themselves from the prospectus.  


The earlier you start, the better. Even if you’re contributing 1% of your income every month, you’ll be developing a positive habit. 


Roth versus traditional contributions


Is it better to make Roth or traditional contributions to your qualified account? It depends. Here’s the difference, and a simple way to think about it. 


You can make a Roth or traditional contribution (also known as pre-tax) to your 401(k), and you can open a Roth or traditional IRA. 


When you make a traditional (pre-tax) contribution, you’re reducing your earned income for that income tax year, which could result in a lower income tax liability. What that means is that you’ll pay income tax on ALL the money when you withdraw it (both principal and interest). 


When you make a Roth contribution, you’re not reducing your earned income for that income tax year, so you’re not lowering your income tax liability. When you withdraw the money down the road, you get to take out the money income tax free (both principal and interest). 


In summary, if you want to reduce your current year income tax liability, making a traditional contribution could make sense. If you’d like to have all your retirement income tax-free, making Roth-style contributions could make sense. 


How much to save?


As much as you can. No one ever got to retirement and said, “I wish I hadn’t saved all this money.” 


In all seriousness, I encourage you to try to accumulate $1,000,000 for your retirement. Doing so will position you for long-term financial success. 


What will it take to get there? Enter your info into this calculator and it will help you figure out how much you need to be contributing based on your age and current financial situation. 


Even if you end up coming up short, it’s far better to fall short with $700,000 saved, then to plan for trying to retire on $250,000; I don’t think that’s enough money. 




You’re responsible for your personal finances, and for saving for your retirement. Wherever you’re at, it’s time to get serious and start planning for the future you want. You can have a happy and prosperous retirement. 


If you’re ready to take control of your financial life, check out our DIY Financial Plan course. 


We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course. 


Connect with one of our Certified Partners to get any question answered. 


Stay up to date by getting our monthly updates.


Check out the LifeBlood podcast.


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