What is a defining characteristic of a tax-qualified retirement plan?

A defining characteristic of a tax-qualified retirement plan is that money placed in the account is tax-deductible. This means that contributions to the plan can be made with pre-tax income, effectively reducing the taxable income for the individual in the year the contributions are made. This feature encourages individuals to save for retirement by allowing them to defer paying taxes on that income until they withdraw it during retirement, when they may be in a lower tax bracket.

This tax advantage is intended to incentivize savings for future retirement needs, providing a foundation for the tax benefits associated with tax-qualified plans. When funds are eventually withdrawn during retirement, they are treated as taxable income, allowing the government to collect taxes on this income at that point in time.

In contrast, the other options do not accurately reflect the characteristics of a tax-qualified retirement plan. For instance, contributions cannot be made only after taxes for a tax-qualified plan, and while there may be provisions for tax-free withdrawals under certain circumstances, they are typically subject to age restrictions and penalties for early withdrawals. Additionally, contribution limits are indeed imposed by the IRS on tax-qualified plans to ensure that the benefits are targeted and to prevent excessively high contributions.