Retirement Plan Basics: Understanding Qualified vs. Non-Qualified Retirement Options
Hey there! Let's chat about retirement plans, a hot topic for many folks.
Nowadays, you've got your 401(k)s and IRAs for savings, but there's another type of retirement plan called non-qualified plans that are gaining popularity. These babies include deferred compensation plans or supplemental executive retirement plans (SERPs).
Non-qualified plans offer tax-deferred growth, much like 401(k)s and IRAs. They stand out, though, with fewer legal contribution caps. If you're a high-earning employee, these plans can be like rocket fuel for your retirement account balances.
But what's the deal with qualified and non-qualified plans, and how do you pick the right one?
Qualified plans, like 401(k)s and IRAs, have a cool tax-free growth thing going on, but they're limited by IRS rules. Non-qualified plans, on the other hand? They're a bit more flexible, often offered to top performers as a way of expanding retirement savings even further.
In 2024, 401(k) plans held around $8.9 trillion in assets, serving over 70 million Americans. In comparison, non-qualified deferred compensation plans had $198.8 billion in assets. Though smaller in size, they've grown significantly over the past few years. Usually, they're used to boost 401(k) plans for high earners, or as a recruitment tool due to their tax advantages.
Here's a quick breakdown on how the two compare:
Now then, let's dive a bit deeper into non-qualified plans. They let employees decide when their deferred income will be paid out by the employer, which can be at retirement, termination, death, or a predetermined date. Unlike qualified plans, with non-qualified plans, you can select a specific date to defer payments for big-ticket expenses, such as a child's education.
However, there's a catch: funds in non-governmental 457(b) plans are not protected from company creditors because they're not subject to Employee Retirement Income Security Act (ERISA) regulations. If the company goes bankrupt, creditors can seize some or all of these funds. In comparison, 401(k) funds are subject to ERISA regulations.
All in all, both qualified and non-qualified retirement plans offer tax-deferred growth, allowing investment gains to compound tax-free. If you're among the top earners in your company, you might be offered a non-qualified plan, which gives you the chance to save even more for retirement. Just remember to weigh the pros and cons before jumping in.
- In wealth-management and personal-finance discussions, non-qualified retirement plans like deferred compensation plans or supplemental executive retirement plans (SERPs) are gaining popularity, thanks to their flexibility and ability to accomodate high-earning employees, further expanding retirement savings.
- When it comes to investing in retirement plans, it's essential to understand the difference between qualified and non-qualified plans. While qualified plans like 401(k)s and IRAs have tax-free growth but are limited by IRS rules, non-qualified plans, such as non-governmental 457(b) plans, offer more flexibility, but funds in these plans are not protected from company creditors due to not being subject to Employee Retirement Income Security Act (ERISA) regulations.
- The breakthrough of non-qualified retirement plans, such as deferred compensation plans or supplemental executive retirement plans (SERPs), has allowed investors the opportunity to utilize alternative investment vehicles, like tokens or cryptocurrency, for wealth-management purposes within these plans, leading to a growing trend of Regulation A+ Initial Coin Offerings (ICO) for retirement investing.
