Qualified vs Non Qualified Retirement Plans? When it comes to your financial plan, it is important to understand the difference between “Qualified” money and “Non Qualified” money.

There are two types of money in the eyes of the IRS: Qualified Money and Non-Qualified Money.

Qualified money is “before tax” money.

This means you did not pay taxes on this money when you invested it. While invested, this money will grow tax-deferred. No taxes will be owed on gains within the account each year and therefore you will not get a 1099 form each year. Qualified plans receive this special tax treatment because they were designed with retirement in mind.

Of course, if you don’t pay the taxman now, you will simply pay him later. Taxes will become due on a Qualified plan each year that you draw an income from the plan. And if you decide to take the money out before the current minimum distribution age of 59 1/2, you will also pay a stiff 10% penalty to the IRS on the entire withdrawal amount. Finally, once you reach age 70 ½, the IRS requires you to begin taking required minimum distributions from your Qualified account each calendar year.

Non Qualified money is “after tax” money.

When you invest outside of a “Qualified” plan, you do not get to write off this investment on your taxes. Put simply, money invested into Non Qualified plans will not get an upfront tax break. Additionally, the investment earnings could be taxable each year. It all depends on the type of investment you use.

For example, if you place your Non Qualified investment dollars into a CD at the bank, you will have to pay tax on the interest earnings every year. Each year, the bank will send you a 1099 tax form showing you the amount of interest earned. You are required to pay taxes on those earnings for that specific tax year. Note that you will have to pay a tax on these earnings regardless of whether you took the money out of the Bank CD or not.

by John Bearss, http://ftmdaily.com/retirement-minute/qualified-vs-non-qualified-retirement-plans/