Typical tax-deferred or tax-advantage savings plans haven’t proven themselves to be a guaranteed way to help people keep more of their savings protected from the tax man. This is for two reasons. First, the tax bill does come due when account owners withdraw money as income and secondly, because of the fees that providers levy upon these accounts. While some financial providers may offer very low fees, it’s more common to find yearly fees of over one percent, according to Forbes. That’s even true for group retirement accounts that are offered at work. The common wisdom about deferring the tax bill really only does put off the inevitable and might even result in losing more money to taxes and fees.
Qualified vs. Non-Qualified Savings Plans
Qualified savings: Qualified plan examples include a typical 401k or 403b or a traditional IRA. They might allow savers to deduct savings, within limits. They also offer tax advantages to employees, such as certain tax deductions. Qualified plans have to follow the rules and restrictions that have been defined by the IRS. One major restriction is that they include penalties for withdrawing money early, so they are hardly liquid.
Individuals and families who might want to access their own savings for investments outside of the plan, education, and other uses will be unlikely to benefit from a qualified plan because of the restrictions. For example, it’s very conceivable that some account owners will need to find third-party loans for their needs even when they have adequate funds saved inside of their qualified account.
Nonqualified savings: Paradigm suggests considering a private and non-qualified retirement plan. The proprietary plan is considered non-qualified because the income is taxed in the year that it’s earned. However, this move allows an account owner to enjoy an income later without concerns about taxes either on the base contributions or any gains that the money earns later. If the account holder wants to access his or her own money to invest, handle an unexpected bill, or help a child with tuition, this can be done without the “gotcha” of tax consequences that could potentially be much worse than just handling the taxes on the money as it is earned.
In fact, Zacks reports that nonqualified plans are often offered as a perk for their top employees. According to Zacks:
Nonqualified retirement plans are often offered by small businesses with a limited number of full-time or executive employees or by large corporations that wish to offer additional benefits to top-tier executives. In both instances, nonqualified retirement plans are used as recruiting and retention tools.
Companies use these sophisticated tools as a way to retain and attract top talent and successful executives. This is because they can offer perks inside of nonqualified plans that would be forbidden in a qualified plan. These alternatives may also be offered to high-income individuals who would normally already exceed the allowed contribution levels inside of a qualified plan.
Employers may have good intentions when they set up qualified plans for employees. They may help some workers save. Still, many employers reserve nonqualified alternatives for their top employees.
How Do Private and Nonqualified Retirement Plans Save Money?
You can choose a nonqualified savings plan that offers you these advantages:
- Guaranteed returns on your money
- Tax-free withdrawals of both your contributions and growth
- Total liquidity of funds
- Tax-free transfer of wealth to heirs of any funds left
You can also remain flexible about the way that you use your own own money. When you set up a qualified plan, you almost have to be psychic about your needs in 10, 20, or 30 years. With a nonqualified plan, you are free from concerns about tax penalties that may get levied on you just because you need access to your own funds. You can become your own bank and financial company and enjoy access to your own savings when you need them.
How to Learn More About Private and Nonqualified Plans
Finally, you don’t have to work for an organization that offers an unqualified savings plan. You can set up your own private plan. In this way, you can reward yourself in the same way that corporations and nonprofits reward their most valued and sophisticated employees. By setting up a private plan, you have the chance to customize it in a way that works well for you and your family. Contact Paradigm Life to learn how you can enjoy the benefits of this better way to save.