Qualified and non-qualified retirement plans each have their own advantages and disadvantages. These plans are sometimes associated with employers, which means that you may only be able to contribute to the plan through your employer. However, some plans are independent of employers.
A qualified retirement plan meets certain requirements in order to receive tax benefits not available to other types of plans. These plans may be structured so that the plan is part of an employer's retirement benefits package, or they may be independent of an employer plan. The qualified plan may accept tax deductible or non-deductible contributions. If the contributions are tax deductible, then all withdrawals from the plan are taxable. If the plan contributions are non-deductible (as is the case with Roth accounts), the withdrawals are normally tax-free. Regardless, all plans allow for tax-free buildup inside the plan.
Video of the Day
Non-qualified retirement plans fail to meet IRS guidelines for qualified retirement accounts. These plans accept only non-deductible contributions. Money is taxable to the employee when it is received. All money that grows inside the plan is tax-free, however. An example of this type of plan is an annuity. Annuity contributions are always made on an after-tax basis, and gains are taxed when withdrawn from the plan.
The benefit of a qualified plan is that you are able to receive tax benefits on the contribution or the withdrawals. These benefits may result in a larger total retirement savings or net income due to the fact that taxes are either deferred or eliminated altogether on your retirement savings. A non-qualified account's biggest advantage is that there is no contribution limit associated with the account. You may contribute as much money to the plan as you want.
The disadvantage of qualified retirement plans is that there are defined contribution limits. An IRA, for example, limits contributions to $5,000 per year for those under age 50 and $6,000 per year if you are 50 or over. This might limit the amount of money you are able to accumulate if you want to save more than the contribution limit allows.
The disadvantage to non-qualified plans is in the fact that they do not receive all of the tax benefits that qualified plans receive. You may end up with less net income and total retirement savings when compared to a qualified plan as a result.