9.1 Qualified Versus Nonqualified Plans
Retirement plans can be categorized as qualified or nonqualified. Retirement plans that are considered qualified meet requirements* by the federal government and receive certain tax benefits. Retirement plans that do not meet the requirements of the federal government are nonqualified plans and do not receive tax benefits.
*Requirements are detailed in table format on the next page (Lesson 9.1.1).
An employer implements a retirement plan for its employees through individual retirement accounts (IRAs), tax sheltered annuities (TSAs), and other plans that are recognized by the IRS. For example, if a person pays a percentage of their paycheck every month to a retirement plan and the company contributes or matches this percentage, the amount the company pays is tax deductible.
Take Joe, for instance. Let's say that Joe, age 30, puts $100 every month into a bank account until the age of 65. Although Joe is planning for retirement, because this plan is not qualified, he will have to pay taxes on this money every year.
