Non-Qualified Investment Accounts Vs. Qualified Accounts

Qualified and non-qualified accounts can both hold stocks, bonds and other securities.
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Under federal tax laws, some investment accounts are referred to as qualified. This means that these accounts have certain tax advantages over non-qualified accounts. You can hold everything from stocks and bonds to certificates of deposits in both qualified and non-qualified accounts. The tax status doesn't generally affect the account holdings, but there are are substantial differences between qualified and non-qualified accounts.


Retirement plans such as 401(k)s, SIMPLE IRAs and traditional pensions are tax-qualified. You use these types of plans to save money for your retirement years, so long-term growth is generally at the forefront of your mind when you're putting cash in these accounts. Under federal tax rules, you can deposit pre-tax earnings into qualified accounts. These investments also grow tax-deferred, which means you don't pay any tax on the contributions or earnings until you make withdrawals. In contrast, you can only deposit already taxed funds into a non-qualified account. Worse still, your earnings in such accounts are subject to annual income tax and possible capital gains tax throughout the investment term.


Non-qualified accounts are fully taxable, but these investments are also easily accessible. You can sell stocks and redeem shares at any time without having to pay any penalties to the IRS. In contrast, you usually have to pay a 10-percent tax penalty if you withdraw money from a qualified plan before you reach the age of 59 1/2. You pay this penalty in addition to regular income tax. You can avoid the penalty if you become disabled and in certain other situations, but no such restrictions apply to non-qualified accounts.


You can deposit as much money as you like into non-qualified accounts. Once you've paid income tax on your earnings, you can do with your money as you please. In contrast, qualified accounts are subject to contribution limits. The IRS makes these rules to ensure that you don't avoid paying taxes altogether by hoarding all of your cash in tax-deferred accounts. As of 2012, you can only deposit up to $17,000 per year into your 401(k). If your income exceeds certain limits, you're not even eligible to deposit cash into Roth Individual Retirement Accounts. Restrictions also apply to both employer and employee contributions into other kinds of qualified retirement accounts.


When you cash in your qualified retirement accounts you have to pay ordinary income tax on your earnings. Depending on your tax bracket, you may lose up to 35 percent of your money to income tax. On a non-qualified account you pay income tax on dividends and interest. If you sell stocks, bonds or other assets for profit then your earnings are subject to capital gains rather than ordinary income tax. Gains on securities you held for at least one year are taxed at the long-term capital gains rate. As of 2012, the long-term rate is 15 percent. This means you may end up paying less in taxes on your non-qualified earnings than on your qualified earnings.

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