Tax-deferred Plans

Tax-deferred Plans with

Mature Texans Financial Solutions

Tax-deferred savings plans are financial accounts that allow individuals to save for retirement while enjoying certain tax benefits. In these plans, interest is not taxed in the year it is earned, providing a current tax benefit. Instead, the contributions are tax-free and the earnings grow tax-deferred allowing savings to compound, which increases the annual yield until the individual begins making withdrawals. One of the benefits of an annuity is that it grows tax deferred, and you only pay federal income tax on any interest you withdraw.

Qualified vs Non-qualified Money

Qualified and non-qualified money refer to different categories of funds based on their tax treatment, especially in retirement savings and investments. Let’s look at each of them.

Qualified Money:

The U.S. Government offers retirement savings plans that allow you to set aside money from your paycheck for your future. This money is deducted before any taxes are taken out and is invested in one of the government’s approved retirement plans, such as Traditional IRAs, 401(k)s, 403(b)s, 457(b)s, TSAs, TSPs, or Simplified Employee Pension (SEP) IRAs.

When you take money from one of these qualified plans, you’ll owe taxes on the initial amount you invested and any earnings, typically when you retire. This is known as tax-deferred because the IRS allows you to delay paying taxes until you withdraw the money. Keep in mind that if you withdraw funds before you’re 59½, there is a 10% penalty.

Non-qualified Money:

Non-qualified plans involve money on which you’ve already paid taxes—this means they are funded with after-tax dollars. More importantly, these plans do not fall under the government’s retirement savings programs.

On the other hand, qualified plans, like Roth IRAs and Roth IRA Conversions, don’t provide special tax treatment upfront because contributions are not deducted from pre-tax income. However, with these plans, you have the advantage of being able to withdraw the principal anytime tax-free. Additionally, after reaching age 59½ and having the account for at least five years (known as the five-year rule), you can withdraw both principal and interest tax-free. Contact Us to learn more about 5-Year Rule.