Whether you intend to retire in the near future or several decades from now, you might be wondering how non-qualified assets can help you prepare for your retirement. Although the Internal Revenue Service treats non-qualified assets differently from qualified ones, some non-qualified assets grow on a tax-deferred basis and can provide supplemental income to you before and after you leave the work force.
Reviewing some basics about non-qualified vs. qualified assets will help you stay on top of your investment strategies. With the help of a tax advisor, you can choose the assets and investments that best suit your savings strategy.
Non-Qualified Assets vs. Qualified Assets
Non-qualified assets consist of money that can be used for any purpose and are funded with post-tax dollars. These include account like a checking, savings or brokerage account, explains Hamilton Financial Planning. Non-qualified investments generally do not have restrictions that limit your ability to contribute to them in a given year, and they do not require you to take money out of your account when you reach a particular age.
Only certain non-qualified investments grow on a tax-deferred basis. Qualified assets, on the other hand, consist of money that is specifically earmarked to provide income during your retirement years and are funded with pre-tax dollars.
Qualified investments such as your employer’s 401(k) typically allow you to contribute to your account only up to a dollar amount specified by the Internal Revenue Service each year, penalize you for taking early withdrawals before you reach the age of 59 1/2 and require you to start taking withdrawals no later than when you turn 72 years old. Many qualified assets include provisions that allow both you and your employer to contribute to your retirement account, and contributions from both sources grow tax-deferred.
Examples of Non-Qualified Assets
Non-qualified assets include investments provided by your employer that are in addition to those provided to all of the company’s employees, as well as individual accounts you can set up and fund independently of your workplace. Non-qualified investments that your employer may offer include a deferred compensation program and cash-value life insurance.
Brokerage accounts that you set up outside of your workplace and use to purchase stocks and mutual funds are also considered non-qualified assets. Your savings accounts, certificates of deposit and bonds are also examples of non-qualified assets.
Taxes on Non-Qualified Investments
How the funds in your non-qualified accounts will be taxed by the IRS depends on various factors, including the type of financial instrument that is held in a particular account. For example, if you own stocks, their purchase price is your basis, and you will be taxed on the difference between your basis and the equities’ re-sale price when you sell the stocks. If you have an interest-bearing savings account, the IRS will tax the interest you earn in that account at the end of each tax year.
Implications of Roth IRAs
While IRAs are generally considered qualified assets, Roth IRAs have several of the same characteristics that non-qualified investments have. For instance, you contribute to your Roth IRA with post-tax dollars, and you are not required to take money out of your account at a particular age. With a traditional IRA, you make pre-tax contributions and pay taxes when you start to withdraw your money after retirement.
Deborah Barlowe began writing professionally in 2010. With experience in earning securities and insurance licenses and having owned a successful business, her articles have focused predominantly on finance and entrepreneurship. Barlowe holds a bachelor’s degree in hotel administration from Cornell University.