The two terms used to describe whether or not special federal tax benefits apply to retirement plans are:
a. Qualified; nonqualified
Explanation:
1. Qualified: When a retirement plan is qualified, it means that it meets specific requirements set by the Internal Revenue Service (IRS) to receive favorable tax treatment. Contributions made to qualified plans are often tax-deductible, and the earnings on investments within the plan grow tax-deferred until withdrawals are made in retirement.
2. Nonqualified: Nonqualified retirement plans do not meet the IRS requirements for favorable tax treatment. Contributions to these plans are usually made with after-tax dollars, meaning they are not tax-deductible. Additionally, the earnings on investments in nonqualified plans are typically subject to income tax in the year they are earned.
By understanding the distinction between qualified and nonqualified retirement plans, individuals can make informed decisions about saving for retirement and maximize the tax benefits available to them.
