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tagged: Non Qualified vs. Qualified.
Lately I have noticed that even though many advisors should know the difference between non-qualified and qualified funds they still have trouble grasping the differences. Lets discuss some of the ways you can tell whether your client has a qualified plan. A few key terms you might be able to recognize immediately are IRA, 401(K), 403(b), SEP IRA, 457 plan, Thrift savings plan, and many others that share common IRS terms in the title. What do all these plans have in common? They are all qualified and are different forms of a pension plan. So how do you know these are considered qualified? Well beside the fact that the IRS tells us they are qualified, they have something else in common. Each of them are usually tax deductible or the money you add to these plans goes in before taxes. To break this down further, let us assume you have a regular job and your employer offers a 401(K). Each time you get paid you have taxes, insurance and 401(K) coming out of your paycheck. The money for the 401(k) comes out before they determine how much tax to subtract from your pay. That means you don’t have to pay tax on the money that goes into the 401(K). This makes the funds inside a 401(k) tax qualified. However, when you decide to start taking an income from your 401(K) you will have to pay taxes at that time.
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