Wednesday, August 8, 2012

Retirement Plans: Qualified and Non-qualified

Qualified retirement plan

This form of retirement plan is one that is certified by the " Internal Revenue Code Section 401(a)" and the "Employee Retirement Income Security Act of 1974 (ERISA)" therefore it has more advantages regarding tax treatment, allowing employers to subtract yearly permissible contributions for every participating employee and the earnings on these contributions are "tax-deferred" until taken out for every participant; and some taxes may be deferred further by means of transferring into another different kind of IRA.

Let's look at what this can do for employers.

First of all it can Draw experienced employees into their company. It can also motivate and retain good employees. It encourages employees to set aside financial aid for future use or for retirement because the benefits of the Social Security alone are not enough to support a sensible way of living for retirees, and it can Protect plan assets from creditors.

Two main categories of "Qualified retirement plans"

1. "Defined benefit plans" are company retirement plans, like pension plans, where when an employee, on reaching retirement, will receive a specified amount that is usually based on his salary and number of years in the service, whereby the employer carries the full risk in investment. Both employer and employee, or just the employee alone, can contribute.

2. "Defined contribution plan". This type of plan outlines the amount that flows to employees and how much should be contributed by an employer each year to the retirement plan. It also keeps account balances of all members, and states that no member should receive an allotment greater than 25% of compensation or 30,000 dollars, (whichever is the lesser of the two) throughout any year.

"Non-qualified retirement plan"

These type of retirement plans do not meet requirements set by "Internal Revenue Code Section 401(a)" and the "Employee Retirement Income Security Act of 1974 (ERISA)". They are financed by employers therefore are flexible compared to "qualified retirement plans" but do not have the tax benefits that "qualified retirement plans" offer. Benefits, structured in annuities form, are paid generally at retirement age and are liable to "tax" just like "ordinary income tax"; or in "lump sum" or in a payment that may be transferred or converted into IRA, to suspend or defer taxes.

"Top-Hat plans" (THP), "Excess benefit plans" (EBP) and "Supplemental executive retirement plans" (SERP) are types of non-qualified and deferred compensation plans patterned to complement or enhance "qualified retirement plans".

"Non-qualified retirement plan" supplement "qualified retirement plans" by compensating the benefits that are unavailable to qualified plans and typically covers higher paid company employees. It may be non-funded or funded. The huge disadvantage with this plan is that there is no security promised to the employees in the event that the company should go into bankruptcy, or is sold to another company.

You must always know your options and should develop a plan way before your retirement. Pursuing professional investment advice will help you manage and synchronize your options with a complete and secure financial plan.

Please feel free to use this article in your web-site or Ezine on the understanding that this resource box is included in its entirety.

Author: Thomas G. Holmshaw has compiled a vast amount of information on the topic of retirement. Please visit our web-site to discover many more quality articles, tips and advice covering all aspects of retirement. [http://www.moanpromo.com/retirement]

TradeGreeks - Stock Market investing with Options Trading

The Complete Idiots Guide Retirement Planning By Wuorio, Jeff J. (Google Affiliate Ad)