Qualified and non-qualified assets are like an Olympic team. Certain criteria must be met for an asset to be considered qualified, just like an athlete has to meet certain marks to be called an Olympian. A qualified asset carries some advantages over non-qualified assets, but that doesn't mean a non-qualified asset is worthless. You're more likely to draw funds from a non-qualified asset before you retire.
Assets can qualify for special status if they match the rules set by the Internal Revenue Code. At that point, it receives favorable tax treatment. It is the government's way of encouraging people to save for retirement.
Picking Out Assets
Think of all the letters and numbers you associate with retirement accounts such as IRA, 401(k), 403(b) or 457(b). Each of these accounts meets the particular standards the government sets for that kind of retirement account. These qualified accounts are income tax deferred until the funds are withdrawn after retirement. One exception, the Roth IRA, taxes income when it's earned. Increases in value in a Roth IRA are not taxable.
Finding Qualified Assets
Look at your portfolio and identify the qualified assets. Don't get hung up on where the funds go. Qualified and non-qualified assets invested with the same financial company are always maintained in separate accounts. A qualified account will name exactly what is in it, such as Roth IRA or rollover IRA. Everything else is non-qualified.
No Tax Breaks
Investment accounts, stocks, bonds, mutual funds, savings accounts and certificates of deposit are all non-qualified. These funds can be used before retirement without any penalty. The IRS does not cut you any breaks on these assets. You paid income tax on the money when you earned it. If you make a good investment and it increases in value, you will pay tax on those increases too.
- IRS: A Guide to Common Qualified Plan Requirements
- IRS: Retirement Topic - Tax on Normal Distributions
- IRS: Retirement Topics - Designated Roth Account
- US Department of Labor: Frequently Asked Questions About Pension Plans and ERISA
- Money Masters Investment Program: Qualifying Assets
- Money Masters Investment Program: Assets
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