Yes, a 401(k) plan is a qualified retirement plan.
Qualified money is
"before tax" money. Non-qualified money is "after
tax" money.
Qualified plans are designed to offer
individuals added tax benefits on top of their regular retirement plans, such
as IRA s:
Employers
deduct an allowable portion of pretax wages from the employees, and the
contributions and the earnings then grow tax-deferred until withdrawal.
- You
did not pay taxes on this money when you invested it.
- While
invested, this money will grow tax-deferred.
- No
taxes will be owed on gains within the account each year and therefore you will
not get a 1099 form each year.
- Qualified
plans receive this special tax treatment because they were designed with
retirement in mind.
-
Examples: 401(k) plans, 403(b) plans, SARSEP plans, SEP-IRA plans, and SIMPLE IRA plans.
Non-qualified plans are
those that are not eligible for tax-deferral benefits.:
- Deducted
contributions for non-qualified plans are taxed when income is recognized.
- This
generally refers to when employees must pay income taxes on benefits associated
with their employment.
- When
you invest outside of a “Qualified” plan, you do not get to write off this
investment on your taxes.
- Put
simply, money invested into Non Qualified plans will not get an
upfront tax break.
- Additionally,
the investment earnings could be taxable each year. It all depends on the type
of investment you use.
Related information:
IRS Guide to Common Qualified Plan Requirements
IRS Nonqualified Deferred Compensation Audit Techniques Guide
