Q:

What is the difference between qualified and non-qualified IRAs?

A:

Quick Answer

The main difference between qualified and nonqualified individual retirement accounts is the taxation on the accounts, explains Investopedia. Qualified plans are not taxed until funds are withdrawn, and funds placed in a nonqualified plan are taxed prior to being put into the account as well as yearly.

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Full Answer

With a qualified plan, employers place funds into an account pretax, meaning the funds are not subject to income tax at the time they are placed in the account, notes Investopedia. The funds then grow through investing strategies until they are withdrawn at retirement. At the time an investor starts to withdraw the funds from the account, the money is taxed as income. Investors are eligible to withdraw funds at the age of retirement, but if the funds are withdrawn early, not only does the investor need to pay the income tax, there is a 10 percent penalty assessed as well. Qualified plans must also meet criteria around disclosure, coverage, participation, vesting, and nondiscrimination in order to be considered a qualified plan.

With a nonqualified plan, funds are placed in the account after taxes have been paid on the income, notes Investopedia. Otherwise, the same rules for a qualified plan apply to nonqualified plans.

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