What is the difference between qualified and non-qualified plans?

Retirement Savings, Retirement Plans
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October 2016
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Qualified - before tax (or pre-tax) money, which includes, but not limited to, the following retirement plans:

  • 401(k)s;
  • 403(b)s;
  • Thrift Savings Plans (TSPs);
  • Simplified Employee Pensions (SEPs);
  • Traditional IRAs;
  • Savings Incentive Match Plans for Employees (SIMPLE) IRAs;
  • Salary Reduction Simplified Employee Pensions (SARSEPs); and
  • Profit sharing.

With a qualified plan, you receive an upfront tax deduction (or reduction) now but will have to pay taxes on the entire amount in the future (or when you begin withdrawing). Required Minimum Distributions (RMDs) will be due by age 70 ½ at the latest (you can begin withdrawing by age 59 ½ without incurring a 10% penalty).

Non-Qualified - after-tax money, which includes, but not limited to, the following:

  • Certificates of Deposits (CDs);
  • Annuities;
  • Mutual Funds;
  • Money Markets; and
  • Savings.

With a non-qualified plan, there are no deductions, but the principal is never taxed twice. Instead, the interest is taxed once withdrawn. Also, there are no RMDs on nonqualified plans. 

Note: Although 457 plans are called nonqualified, they are technically tax-advantaged deferred compensation plans, which are similar to a qualified plan, such as a 401(k) or IRA.

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