Differences Between IRA & Non-IRA Accounts

The Internal Revenue Service refers to individual retirements accounts (IRAs) as qualified plans, while non-IRA structures are non-qualified plans. As a qualified plan, the IRA is subject to certain regulations applied to all qualified plans, such as 401(k) and 403(b) plans. Like consumer savings plans, the IRA has its own specific regulations. Non-qualified savings and investment accounts do not have a tax-qualified advantage.

​Read More​: Similarities and Differences Between Traditional IRA, Roth IRA, & 401k Plans

The Employee Retirement Income Security Act (ERISA) of 1974 created the IRA structure. Contributions into an IRA are deducted from annual income with the assets held in the structure given tax-deferred growth. These are referred to as "qualified" plans resulting from the ERISA tax-qualified structure regulated by the Internal Revenue Service.

Initially, ERISA created one structure, now known as the traditional IRA. The Taxpayer Relief Act of 1997 created a new structure, the Roth IRA, in which contributions are not deductible. As with the traditional IRA, all Roth IRA assets grow under tax-qualified deferred rules. However, normal distributions from a Roth IRA are not taxed, which is a benefit not available with the traditional IRA.

An IRA is not the only tax-qualified account that exists. In fact, the IRA was established to cover those not already covered by qualified employer plans. Employer plans include 401(k) and 403(b) plans.

The difference between the IRA and the employer plan is two-fold. Employees have higher contributions limits. For an IRA, the contribution limit in 2021 is ​$6,000​ (​$7,000​ for people age 50 and older), while the contribution limit is ​$19,500​ (​$26,000​ for people age 50 and older) for a 401(k) plan. In addition, employers can match or contribute on behalf of employees, maximizing retirement savings for the employee.

Employer plans have developed over time with some using the IRA structure in a small employer setting, such as the Simplified Employee Pension (SEP) IRA or the Savings Incentive Match Plan for Employees (SIMPLE) IRA. In 2021, the SIMPLE IRA allows a maximum contribution of $​19,500​ (​$22,500​ for people 50 or older), and the SEP IRA has a contribution limit of ​$58,000​ annually or ​25 percent​ of income, whichever is LESS.

Non-qualified accounts are all accounts not granted tax-qualified status by the IRS. These include your regular checking and savings accounts or investment accounts that have taxable earnings or gains annually.

One exception to the tax rules for non-qualified accounts is a deferred annuity. These investments are sold by insurance companies with a tax shelter granted on earnings.

Like an IRA, money withdrawn from the annuity constitutes a taxable distribution. Unlike the traditional IRA, only earnings are taxed. Normal distributions can start at age 59 1/2, which is the same age requirement as an IRA, and early taxable distributions are penalized ​10 percent​.

​Read More​: 401K vs. IRA: What's the Difference?

It is important, especially for younger investors, to have a mix of investment structures. Employer plans are effective savings vehicles for retirement because of the high contribution limits and employer contributions. However, employer plans and all qualified accounts require holding funds until at least age 59 1/2 to prevent penalties.

If you have a financial emergency, you might incur significant taxes and penalties if you are forced take early distributions from those accounts. For this reason, it is important to maintain at least six months worth of liquid, non-qualified assets. If you are saving for something specific, such as a house, a significant amount of accessible money is needed.