Qual vs Non Qual

On this edition of Summit Financial Partners question and answer, Ryan receives a question regarding qualified versus nonqualified accounts.  A big part of Ryan’s responsibility is to educate his clients on different types of accounts and how they can impact your retirement and more specifically your taxes.  A qualified account is an account that people are able to save funds without paying taxes on the savings.  These are most commonly known as employer sponsored retirement accounts, like a 401(k), 403B, 457, or TSP.  An IRA or individual retirement account is also a qualified account. Because the government allows you to not pay taxes on the funds that you save for these accounts, these accounts do become fully taxable when you take distributions out in retirement.  So, your tax burden on these types of savings accounts is higher than Nonqualified accounts in retirement.  Traditionally when you take distributions from an account you are only taxed on the gains.  But you are taxes on the gains and principal for qualified accounts when you take distributions out in retirement.   The common belief is that you will be in a lower tax bracket in retirement because you’re no longer working, so that when you do take distributions your tax bracket will be lower than it was during your working years making this a significant advantage overall.  It is very important that you work with a specialist so that you know what your taxes will be on these distributions, and also to create strategies to make these distributions on the most tax favorable basis possible in retirement.  It is ideal to have a mix of non-qualified and qualified assets in retirement so that do you have flexibility in terms of what accounts do you want to take distributions from in any given year.  Also, it is important to remember that at age 72, the government forces you to start taking distributions from any qualified accounts that you may have.

What does Qualified Assets mean?

• Qualified assets referrers to money that was saved on a tax favorable basis.
• You are not required to pay taxes on the money contributed to tax qualified plans.
• Qualified Tax plans are 401ks, IRAs, 403bs, 457s, or TSPs.
• Because you didn’t pay taxes when you put the money way, they are fully taxable when you take distributions.

What are the different ways that Qualified assets could impact my plan?

• People in retirement need to account for how their distributions will be taxed when they occur.
• At 72 years old the government forces you to start taking distributions from these accounts (RMDs).
• These accounts will increase your taxable income because they are counted as ordinary income.

What advice does Ryan have for people looking to plan for retirement?

• Make sure that you work with a specialist that can guide you on the different strategies to address the tax implications of these accounts.
• There are certain investments and annuities that are designed to help minimize the taxable liability of certain assets.
• Make sure your plan is designed that can maximize the advantages of both qualified and non-qualified accounts.