Qualified vs. nonqualified retirement plans
Both work similarly, offering tax benefits as you save for retirement
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Qualified and nonqualified retirement plans generally work very similarly, providing tax savings to people who save for the future using the plan. A qualified retirement plan is generally an employer-sponsored retirement plan like a 401(k) or pension. Qualified plans usually take pre-tax money, allowing you to pay income tax only when you withdraw money from the account in retirement.
Nonqualified retirement plans are available for some self-employed people and small companies, as well as people who want to save for retirement but don’t have access to a plan through their employer. Nonqualified plans include all types of IRAs.
A nonqualified plan that’s set up as a deferred compensation plan is also unique. This type of plan offers benefits to the company because they can tie payment of regular compensation, bonuses, company equity, or other fringe benefits to a vesting schedule. These plans also allow highly compensated employees to receive retirement benefits at different rates or amounts than regular employees, a feature that qualified retirement plans don’t have.
The other key differences between qualified and nonqualified retirement plans come down to the tax code and other legal details. Qualified plans are defined in Section 401 of the Internal Revenue Code. They’re also governed according to the funding, reporting, and management rules laid out in ERISA, the Employee Retirement Income Security Act of 1974. (ERISA is a labor law that also covers some health insurance plans.)
Key Takeaways
Qualified retirement plans allow you to save for retirement through an employer by investing some of your income, usually before income taxes are withheld
Qualified plans, like a 401(k), are defined in Section 401 of the tax code and governed ERISA, a 1974 labor law
Nonqualified retirement plans may be available even if you don’t have an access to a retirement plan through your employer
Some nonqualified plans are deferred compensation plans, which don’t allow you to save and invest in the same way as a qualified plan
Common types of qualified retirement plans
Most employer-sponsored retirement plans are qualified plans, but each has its own rules, requirements, and contribution limits. Below are the types of qualified retirement plans:
A 401(k) plan or similar defined contribution plan
A pension or other defined benefit plan
An employee stock ownership plan (ESOP)
A Keogh plan or H.R. 10 plan
Learn more about how qualified retirement plans work.
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Common types of nonqualified retirement plans
While most nonqualified retirement plans are still available through an employer, there are options for self-employed workers and people who want to save for retirement without going through their employer.
Common examples of nonqualified retirement plans include the following:
Self-directed IRA
SIMPLE IRA (Savings Incentive Match Plan for Employees Individual Retirement Account)
SEP IRA (Simplified Employee Pension Individual Retirement Accounts)
SARSEP (Salary Reduction Simplified Employee Pensions)
Executive bonus plan
Nonqualified deferred compensation plan (NQDC plan)
403(b) plan
457(b) plan
Learn more about how nonqualified retirement plans work.
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Derek Silva
Personal Finance Expert