Why Choose a Non Qualified Retirement Plan?

The right non-qualified retirement plan can do more than save you pennies.

The right non-qualified retirement plan can do more than save you pennies.

On the surface, a "non-qualifying" retirement plan might look like a bad deal. These plans don't have to meet the same federal qualifications as a 401(k) or traditional Individual Retirement Account (IRA), which means your investment is riskier. All the same, non-qualifying plans such as Roth Individual Retirement Accounts (IRA), stock options or deferred compensation still have a lot to offer you.

Taxes

When you contribute part of your paycheck a 401(k) or a traditional IRA, you don't pay income tax on the money. With a non-qualified plan, your contributions are taxable, but your withdrawals later are tax free. If you anticipate making plenty of money in your later years, investing in a Roth IRA means never worrying that withdrawals will raise your taxable retirement income. A deferred compensation plan works differently, because it delays some of your salary until you leave the company. If the company structures the plan carefully, you won't owe tax on the deferred payments until then.

Limits

The federal government won't let you put more than $5,000 a year, at time of publication, into a qualified plan or a Roth account. With other non-qualified plans, such as deferred compensation, there's no limit. If you can afford to save lots of your salary, a plan that allows you to sock away bigger amounts than an IRA makes sense. Because deferred compensation plans allow large retirement savings and delay tax payments, they're popular with executives pulling down $100,000 or more.

Flexibility

With an IRA or 401(k), you have to stop contributing money after you reach 70 1/2 years. Instead, the federal government requires you make a minimum withdrawal every year after that. Non-qualified plans offer more flexibility: a Roth account, for example, allows you to keep depositing money well after 70 1/2, and you never have to withdraw it. Your employer can set up a deferred compensation plan so that you can decide when or if to make withdrawals, rather than letting the IRS make the call.

Considerations

One advantage to a qualified plan is that the money is safe: your firm's creditors can't touch money in a 401(k) and the firm's bankruptcy doesn't affect your account. Non-qualified employee plans don't have that protection: if you defer $100,000 in compensation, for example, and your firm goes belly up, you could lose everything to the corporate creditors. Before you invest in any unprotected plan, research the risk and decide if the potential gain is worth it.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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