Which statement describes the tax treatment of non-qualified retirement plans?

• A. Taxes may be due on investment earnings
• B. They are always tax-exempt
• C. They are taxed the same as qualified plans
• D. They are guaranteed by the government

Answer: (A)

Non-qualified retirement plans don’t get the favorable tax treatment that qualified plans do. Contributions to these plans aren’t deductible, so the money youInvest has already been taxed. When you withdraw, the portion that represents earnings is taxed as ordinary income, while the return of your after-tax contributions comes out tax-free. In other words, taxes can be due on the investment earnings at withdrawal. These plans aren’t guaranteed by the government, and they’re not always tax-exempt or taxed the same as qualified plans, which is why the statement about taxes on investment earnings best captures their tax treatment.