Personal Finance

Non-Qualified Investment Accounts vs. Qualified Accounts

Many people who save for retirement have access to qualified plan accounts such as 401(k)s. Yet you don't have to do all of your saving in a qualified account, and many people use regular nonqualified investment accounts to supplement their retirement savings. Below, we'll take a look at the difference between these two types of accounts to help you decide which is right for you.

What's a qualified plan account?

Qualified plans refer to employer-sponsored retirement plans that comply with the requirements of the tax laws, as well as a law called the Employee Retirement Income Security Act of 1974, or ERISA for short. ERISA-qualified accounts offer tax benefits, including tax deferral of income within the account, tax deductions or exclusions for contributions to a traditional qualified account, and the right to roll over fund balances into an IRA. By contrast, nonqualified plans don't comply with those provisions and therefore aren't treated the same way for tax purposes.

Technically, IRAs aren't qualified plans, because they aren't offered by employers. Nevertheless, in considering the tax consequences, it makes sense to treat them in the same way as qualified plan accounts, because the tax deferral and deduction features are similar.

How qualified accounts are useful

There are many advantages to qualified accounts. On the investing side, being able to earn income without paying taxes until you make a withdrawal has huge long-term advantages, boosting your ability to build up your retirement nest egg. Deducting contributions can give you a big upfront tax break as well.

Another advantage of qualified accounts is that ERISA provides some protection against creditors. Both ERISA-qualified plan accounts and IRAs are entitled to preferential treatment in bankruptcy proceedings, and different states have different rules on how to handle qualified plan accounts and IRAs for state-law purposes and for creditor proceedings not involving federal bankruptcy law.

The downside of qualified accounts is that they generally penalize you for taking money out before you reach a specified age, typically 59-1/2. Therefore, if you need money prior to reaching that age, a regular nonqualified investment account is useful.

For the typical retirement saver, having a mix of qualified and nonqualified accounts is best to provide balance and flexibility. That way, you know you can always access some of your money while also taking advantage of tax benefits for the rest.

The $15,978 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in theFoolsaurus. Pop on over there to learn more about our Wiki andhow you can be involved in helping the world invest, better! If you see any issues with this page, please email us atknowledgecenter@fool.com. Thanks -- and Fool on!

The article Non-Qualified Investment Accounts vs. Qualified Accounts originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More