How does the IRS classify the two different types of retirement accounts?

The IRS classifies retirement accounts primarily into two categories: qualified and non-qualified. A qualified retirement plan complies with specific federal regulations under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). These accounts, such as 401(k) plans and traditional IRAs, typically offer tax benefits, including tax-deferred growth on investments and potential tax deductions on contributions.

On the other hand, non-qualified retirement plans do not meet these stringent IRS requirements, often resulting in fewer tax advantages. Non-qualified plans can include deferred compensation agreements and certain types of pensions that do not adhere to ERISA's guidelines.

Understanding this distinction is vital for individuals planning for retirement as it greatly impacts tax treatment, contribution limits, and distribution rules. By recognizing how the IRS categorizes retirement plans, one can make more informed decisions regarding their financial future.