Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What is the tax treatment of distributions made by non-qualified retirement plans?

1. At a maximum of 15%

2. At ordinary income rates

3. Tax-free if rolled over

4. At capital gains tax rates

The correct answer is: At a maximum of 15%

The correct answer reflects that distributions from non-qualified retirement plans are treated as ordinary income. This means that the amounts received by the taxpayer are subject to taxation at their personal income tax rates, which can vary based on overall income. Non-qualified retirement plans are not eligible for the same tax advantages as qualified plans, such as 401(k)s or IRAs. In a non-qualified plan, contributions are made with after-tax dollars, and while the investment earnings can grow tax-deferred, any distributions are taxed as ordinary income upon withdrawal. The confusion may arise from the alternative tax treatment of capital gains or the ability to roll over funds, but these concepts apply to different contexts. Capital gains tax rates are typically relevant to investments held in taxable accounts or qualified retirement plans, not non-qualified plans. Additionally, while rollovers can apply in certain situations to transfer funds from one retirement account to another without immediate tax liability, this does not apply to non-qualified retirement plans. Understanding the distinctions between qualified and non-qualified plans, particularly regarding how and when distributions are taxed, is crucial for anyone managing their retirement savings.