Qualified vs. Non-Qualified Retirement Plans

Shawn Plummer

CEO, The Annuity Expert

What Are Qualified Retirement Plans?

Qualified retirement plans are savings plans recognized by the IRS, offering tax benefits. Contributions to these plans are typically tax-deductible, and earnings grow tax-deferred until withdrawal. Withdrawals after retirement are taxed as ordinary income. Examples include 401(k)s and traditional IRAs.

Key Features:

  1. Tax Benefits: Contributions are pre-tax, reducing taxable income.
  2. Earnings Growth: Investment earnings are tax-deferred.
  3. Withdrawal Age: Penalties for early withdrawal before age 59½.
  4. Required Minimum Distributions (RMDs): Must start withdrawals at age 73.
Qualified Vs. Non-Qualified Retirement Plans

What Are Non-Qualified Retirement Plans?

Non-qualified retirement plans are not eligible for most tax benefits of qualified plans. They are more flexible and accessible but offer fewer tax advantages. Examples include deferred compensation plans and executive bonuses.

Key Features:

  1. Tax Treatment: Contributions are with after-tax dollars.
  2. Earnings Growth: Taxes on earnings are often due annually.
  3. Withdrawal Rules: Generally more flexible with fewer penalties.
  4. No RMDs: No required minimum distributions.

Comparison Table

FeatureQualified PlansNon-Qualified Plans
Tax Deduction for ContributionsYesNo
Tax-Deferred GrowthYesVaries
Early Withdrawal PenaltiesYesLess Common
Contribution LimitsYesNo
Qualified Vs. Nonqualified Retirement Plans


Choosing between qualified and non-qualified retirement plans depends on your tax situation, retirement goals, and need for flexibility. Qualified plans are better for long-term savings with tax benefits, while non-qualified plans offer more immediate access and flexibility. Understanding the differences ensures a plan that aligns with your financial goals. Contact us today for a free quote.

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Frequently Asked Questions

What are the two main types of qualified retirement plans?

The two main types of qualified retirement plans are Defined benefits and Contributions. Defined Benefit Plans promise a specific payout at retirement, often based on salary and years of service. On the other hand, Defined Contribution Plans do not guarantee a specific benefit upon retirement; instead, employees and employers contribute funds to individual accounts, and the eventual payout depends on the performance of investments chosen by the account holder.

What are the differences between qualified and non-qualified retirement plans?

Qualified retirement plans, like 401ks, meet IRS guidelines and offer tax benefits, including tax-deferred growth. They’re subject to strict contribution and withdrawal rules. Non-qualified plans, such as deferred compensation, aren’t bound by these regulations and offer more flexibility but lack the upfront tax advantages of qualified plans.

How do I know if my retirement plan is qualified or non-qualified?

To determine if your retirement plan is qualified or non-qualified, check the plan’s documentation or consult your employer’s human resources or benefits department. Qualified plans, like 401ks or traditional IRAs, will typically mention their compliance with specific IRS sections, such as Section 401(a). Non-qualified plans won’t reference these IRS sections. Additionally, seeking guidance from a financial advisor or tax professional can clarify your retirement plan’s specific tax and regulatory status.

How much can I contribute to a non-qualified retirement plan?

Unlike qualified retirement plans, which have specific contribution limits set by the IRS, non-qualified retirement plans don’t have standard federal contribution limits. The employer and employee agreement typically determines the contribution limits for non-qualified plans. This flexibility is one feature that makes non-qualified plans attractive, especially for highly compensated employees. However, it’s essential to review the plan’s specific terms and consult with a financial advisor or tax professional to understand any implications or limits specific to your situation.

Shawn Plummer

CEO, The Annuity Expert

Shawn Plummer is a licensed financial professional, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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