Qualified vs Non-Qualified Retirement Plans
Qualified vs Non-Qualified Retirement Plans
Retirement plans can have many nuances that employees often overlook. For example, it is important to understand the distinction between terms like “qualified” and “non-qualified” retirement plans and what that distinction entails. The Federal Educators team gives insight below so that you can choose the best option for your financial goals.
Why is it Important to Learn About Retirement Savings?
The terms “qualified” and “non-qualified” float around when it comes to retirement savings and here’s why. You more than likely have retirement accounts that come with lucrative tax benefits. The IRS may become involved because of a loophole in said retirement accounts. Say a person deposits retirement funds into a traditional investment account. The individual would pay any contributions and annual taxes on those investment gains. However, a retirement account is different; depending on the type of account, any taxes on gains made would not be paid until they were withdrawn from that account. This could be decades away! Because the IRS wants to mitigate people from taking advantage of this loophole, rules have been placed around these tax-advantaged retirement plans.
Qualified Retirement Plans
Employees with a 401(k) have a qualified retirement plan. Most employers prefer this plan because they receive tax breaks for contributions they make to their employees’ accounts. When an employee contributes to an IRA or non-Roth 401(k), the employer makes a “pre-tax contribution” by depositing on the employee’s behalf. The employee doesn’t pay taxes on the investment gains from the account until they withdraw the funds later in life. Employers must offer qualified plans to all employees that have one year of full-time employment or more. Matching percentages must equal across the board, regardless of the compensation level. As of 2022, the maximum contribution amount for a 401(k) is $20,500 though some retirement accounts offer different maximums for people near retirement age. You may begin withdrawing funds at age 59 ½ years old but, if you need it sooner expect to pay a 10% penalty.
Non-Qualified Retirement Plans
A non-qualified retirement plan is available but has different rules than the above. Often, these plans still allow employees to defer taxes until retirement, but they are not deductible to the employer. There are also added perks for higher-level employees and no rule that everyone must have the option to contribute. For those that choose to contribute to non-qualified plans, there is no maximum contribution amount. Both employers and employees can add as much as they like.
Want to learn more about your retirement plan? Federal Educators can help you prepare for retirement with the perfect combination of educational resources and a knowledgeable team. Call our Tampa office at (813) 755-7037 or request a complimentary benefit analysis today.