Question

When comparing qualified retirement plans to nonqualified retirement plans, which TWO of the following are TRUE?

I. Contributions to qualified plans are tax deductible.

II. Contributions to nonqualified plans are tax deductible.

III. All withdrawals from qualified plans are taxed.

IV. All withdrawals from nonqualified plans are taxed.

		II and IV
		I and IV
		II and III
		I and III

Answer 1

Ans. Option I and III are correct

Qualified retirement plans are the schemes that meet the provisions under the ERISA (Employee Retirement Income Security Act). And because of that, the contribution under these plans is eligible for tax deductions. Example, 401(K), IRA, etc. Withdrawal from these benefits is taxable as ordinary income.

Whereas, non-qualified retirement plans do not meet the ERISA guidelines so the contribution made under these plans are not eligible for a tax deduction. For example, split-dollar life insurance, deferred compensation, etc. The portion of non-qualified distribution is taxable and other potion is generally non-taxable.