Qualified vs. nonqualified retirement plans

Both work similarly, offering tax benefits as you save for retirement

Derek Silva

By

Derek Silva

Derek Silva

Personal Finance Expert

Derek is a personal finance editor at Policygenius in New York City, and an expert in taxes. He has been writing about estate planning, investing, and other personal finance topics since 2017. He especially loves using data to tell a story. His work has been covered by Yahoo Finance, MSN, Business Insider, and CNBC.

Published September 7, 2021|2 min read

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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.

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:

  • Traditional IRA

  • Roth IRA

  • 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.