Retirement Plans - Nonqualified Retirement Plans

Unlike qualified plans, such as defined benefit and defined contribution plans, some plans are nonqualified, meaning they do not meet ERISA guidelines and the employer therefore may not deduct contributions.

However, earnings on these plans are tax deferred until withdrawn.

  • 457 plan - The most common nonqualified retirement plans are deferred compensation plans set up under IRS Code Section 457. These plans are available to state and local government workers and employees of certain nonprofit employers. Like 401(k) and 403(b) plans, a 457 plan allows employees to reduce their taxable income by setting aside a portion of their salary for retirement. A 457 plan may be offered to workers in addition to other defined contribution plans.

Exam Tips and Tricks
Consider these sample exam questions about retirement plans:

  1. A retirement plan is qualified if it:
    1. Is established by an employer instead of an individual
    2. Qualifies for special tax treatment
    3. Provides special benefits for highly paid employees
    4. Is part of an IRA

The correct answer is "b", since qualified plans must be established by the employer, but not all employer retirement plans are qualified.

  1. If a retirement plan is nonqualified, which one of the following statements is always TRUE:
    1. The plan is illegal and should be terminated
    2. Investment earnings accumulate tax-free
    3. The employer may not deduct the plan contributions
    4. It is a defined benefit plan

The correct answer is "c", since nonqualified plans never permit deductibility of the employer's contributions.

  1. The investment policy statement under a qualified plan can best be described as:
    1. A required document that contains the "legal list" of permissible investments in the plan
    2. A written document that outlines the plan's investment objectives and guidelines
    3. The list of prohibited transactions that the fiduciaries must not permit
    4. A written document provided to the plan participants, to limit the trustees' legal liability for poor investment decisions

The correct answer is "b", since the document is designed to provide guidance on investment decisions - not give a list of required or prohibited investments.

Education Plans
Related Articles
  1. Professionals

    Career Advice: Financial Analyst Vs. Investment Banker

    Read an in-depth comparison about working as a Financial Analyst vs. working as an Investment Banker, two highly prestigious business careers.
  2. Professionals

    Who Needs to Take the Series 65?

    Most states require individuals to pass the Series 65 exam in order to act as investment advisors.
  3. Personal Finance

    RIAs and Brokers: What's the Difference?

    RIAs and brokers are held to different standards when providing investment advice. Here's how they differ.
  4. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  5. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  6. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  7. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  8. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  9. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  10. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
  1. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  2. Do financial advisors have to be licensed?

    Financial advisors must possess various securities licenses in order to sell investment products. The specific products an ... Read Full Answer >>
  3. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  4. What role does the 'chip cycle' play in the electronics sector?

    There are several highly acclaimed private Series 6 Exam courses in the United States. Many can be completed online. Popular ... Read Full Answer >>
  5. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  6. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  5. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
Trading Center