IRS Filing Requirements for Non-Qualified Retirement Plans

by Alexis Lawrence

Most retirement plans offered through employers are qualified plans, including individual retirement accounts (IRAs) and 401(k) plans. This means that contributions to the retirement account come out of your paycheck before taxes are taken out, which allows the money to grow on a tax-deferred basis. Non-qualified retirement plans, offered through financial institutions, must be funded with earnings on which income tax has already been paid. The advantage of the non-qualified retirement plan is that the Internal Revenue Service doesn’t require you to pay tax when you withdraw funds.

Non-Qualified Plans

Non-qualified retirement plans include any IRAs in which you must take the money that you earn, after taxes have already been taken out of that money, and make contributions on your own. Examples of this type of retirement plan include Roth IRAs or self-employed 401(k)s. Although the money does not come out of your pay before you receive your check, as it would with an employer-sponsored plan, you can still set up regular distributions on a weekly or monthly basis with transfers from your personal bank accounts.


Because the money that you put into a Roth IRA, self-employed 401(k) or another non-qualified retirement account has already been taxed, you can withdraw money from the account at any time without having to pay taxes again. You can only withdraw up to the total amount of your contributions without taxation though. If you have contributed $10,000 to a Roth IRA, for instance, and you have earned $500 interest, you can withdraw $10,000 without paying taxes. But if you withdraw the last $500, you will have to pay taxes on those earnings.

Filing Requirements

If you withdraw the total amount of money from a Roth IRA, or from another non-qualified account, you must include any earnings over the amount of your contribution as taxable income on your tax return. If you have contributed $10,000, for instance, earned $500 in interest, and withdraw the full $10,500, you must add the $500 to you yearly income. The withdrawal is listed in the “Income” section of Form 1040, the IRS’ standard tax return form.

Advantage of Non-Qualified Plan

Although traditional retirement accounts offered through employers provide the benefit of tax-free savings, this money is eventually taxed. Unlike withdrawing money from a non-qualified retirement account, when you withdraw money from a qualified retirement account that has been funded pretax, you must pay taxes on the entire withdrawal. If the tax rate goes up before you reach retirement, you will be subject to higher taxation on the money. However, if the tax rate goes down, you will have less taxes to pay.

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