How Much Can I Put in a Nonqualified IRA?
The difference between qualified and nonqualified funds can get confusing when looking at various tax-sheltered accounts. Qualified refers to tax-qualified accounts meeting ERISA standards. Qualified plans include IRAs, 401k and other employer-sponsored plans. An IRA is always qualified, but there are other nonqualified tax shelters that work similarly to IRAs, increasing confusion.
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IRA Contribution Limits
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The IRS regulates how much in annual contributions consumers can put into an IRA. The 2011 annual contribution limit is $5,000 with an additional $1,000 allowed for those 50 years and older. This limit is the same for both traditional and Roth IRAs. However, there are phaseout limits determining how much of the maximum you can deduct when making traditional contributions. Falling below the range bottom means you can make a full deduction while income levels over the range cap allow no deduction. Partial deductions are allowed within the phaseout range. The phaseout range determines whether or not you can make a Roth contribution. Falling below the range bottom means you can make a full contribution with no contribution allowed if you exceed income at the top of the range. Partial contributions are allowed within the phaseout range.
Defining an IRA
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Further confusing matters is the acronym IRA. An IRA according to the IRS is an "Individual Retirement Arrangement." However, the acronym is also commonly referring to an "Individual Retirement Account" or an "Individual Retirement Annuity." While both of these alternate references are still qualified plans, the use of the term "annuity" adds another dimension for confusion. An annuity might refer to a qualified plan such as a 403b, also called a Tax Sheltered Annuity. It can also refer to a deferred annuity. A deferred annuity might be an IRA or it might be a nonqualified plan.
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Nonqualified Plans
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Nonqualified plans include your basic bank or brokerage accounts. Of course, you can structure these accounts as qualified IRA assets for retirement savings, but keep nonqualified assets available for liquidity and additional asset growth purposes. A deferred annuity is often confused with qualified plans because it offers tax-deferred growth. The difference is contributions are not deducted from income so they will not be taxed upon distribution. However, the earning grow deferred and are added to income. Like qualified plans, normal distributions start at age 59 1/2 with nonqualified annuities. If you take funds out earlier than this, the earnings are not only added to income but penalized 10 percent by the IRS. There is no IRS limit to how much you can put into an annuity, though the insurance company may have internal limits around $1 million per person.
Considerations
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When you are budgeting what funds to put into what type of account, start with what your employer offers. The reason is you have higher income limits, going as high as $16,500 in 2011 for a 401k or 403b plan. Additionally, employers might match or make other contributions into your account, giving you a retirement bonus -- free money. The IRA offers either tax-deductible contributions in traditional IRAs or the tax-free growth of Roths. Speak with a tax adviser about what is the best option for you. When you have maxed out all qualified plan contributions, used nonqualified deferred annuities to supplement retirement resources further.
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