What Is the Difference Between a Roth IRA & a Non-Qualified Account?

Savings or investment accounts can be broadly divided between qualified and non-qualified accounts. Qualified accounts rate special treatment under the tax rules to provide tax-advantaged savings or growth. Qualified account types include 401(k) accounts, SEP IRAs, and traditional and Roth IRAs. Any account -- such as a bank savings account, mutual fund or brokerage account -- not set up as a qualified account is a non-qualified account. Investment accounts can be of either type. For example, you could have a non-qualified mutual fund or have that same mutual fund as part of your qualified Roth IRA.

A Roth IRA is a type of retirement account that can be established by any person with earned income. Unlike a traditional IRA, Roth IRA contributions are not tax-deductible. However, the earnings in a Roth IRA grow tax-free instead of just tax-deferred as in a traditional IRA. This means you can make regular contributions to a Roth IRA during your working years and draw a tax-free income from the account when you retire. If your tax-deductible contributions are limited by your income or your participation in an employer-sponsored retirement plan such as a 401(k), you can still contribute to a Roth IRA.

The tax rules intend for Roth IRA accounts to be used as retirement savings vehicles. If you want to withdraw money before you are age 59 1/2, you must pay income tax and a 10 percent tax penalty on any earnings withdrawn. Another negative factor is the limited contribution limits to a Roth IRA. If you are under age 50, the maximum you can contribute to all of your IRAs is $5,000 per year ($6,000 once you turn 50). The IRA rules limit what type of investments or securities can be held in a Roth IRA. Stocks, bonds, exchange-traded funds and mutual funds are acceptable, but investments in art, collectibles and precious metals cannot be made with Roth IRA funds.

Non-qualified accounts do not have any inherent tax advantages, but they also do not have tax rule restrictions. You can invest as much or little as you want in a non-qualified account and withdraw money at any time without tax consequences. Use non-qualified accounts for savings or investment goals not associated with your retirement plans or to put large sums of money to work. The major drawback to non-qualified accounts is that earnings and gains become taxable income for the year in which they are earned or realized. Paying taxes reduces the after-tax returns compared with earnings in a Roth IRA.