What is a nonqualified account?

A retirement savings account is one of the key factors of long-term financial wellness. Not only will a well-tended 401K, IRA, or other statement type allow you to live comfortably in your elder days, but it can also sow seeds of wealth and security for the next generation if you are financially independent in the last years of your life.

The best way to build a supportive retirement account is by feeding it regularly, and making absolutely no withdrawals until it’s time to leave the workforce. But life happens, emergency expenditures are demanded, and some individuals simply aren’t in a position to tuck that much away each year in the first place. 

In these cases, having a non-qualified account, singularly or in addition to your other repositories, can offer you a flexible alternative that’s easy to track, and easy to contribute to when you have the means.

But what is a nonqualified account, and how does it work? Let’s talk about it.

The ins and outs of nonqualified accounts

It sounds like high-level terminology when you first encounter it, however a nonqualified account is likely the type with which all of us are most familiar.

A nonqualified account is one to which the account holder or holders can make unlimited contributions and unlimited withdrawals from with no penalties or stipulations beyond standard operating agreements. 

There are also zero tax perks or complications associated with the money that goes into a nonqualified account: the contributions you make are subject to income taxation for the year in which they were earned. This also means that you pay no taxes upon withdrawal unless you are withdrawing interest gains generated on your contributions.

Standard checking and savings accounts are the most common iteration of a nonqualified account. The liquid assets in each make them extremely flexible and thus easier to move around.

A less universal but still popular type of nonqualified account is called a Brokerage account, which must be set up and maintained through a Brokerage firm where you are given the option to invest in a variety of assets beyond simply cash, and thereby increase wealth more quickly. 

Exchange dynamics are not as fluid in the case of a Brokerage account, however you should still expect to pay no taxes on a withdrawal with, again, an exception for capital gains taxes.

Qualified vs. non-qualified accounts

So what is the difference between a qualified account and a nonqualified account? Here are a few key disparities.

  • Both Individual Retirement Accounts (IRAs) and employer-sponsored accounts (401K, etc.) have limits on the amount you can contribute in one year. This might make it difficult to contribute consistently if your income is highly variable.

  • Contributors can receive tax breaks on contributions to qualified account – contributors have the option to defer taxes (with the expectation of ROTH IRAs and will not pay tax on the money within the account until it is withdrawn. You do not pay capital gains taxes on interest earned on qualified accounts.

  • Qualified accounts are less flexible than nonqualified accounts and holders will be required to pay penalties for early withdrawal. Commonly, contributors can begin to withdraw from their qualified retirement account at age 55, with some stipulations.

The benefits of holding a nonqualified account

Qualified vs. nonqualified accounts should not be thought of as a one-or-the-other concept. Each provides its own advantage which can be uniquely applied under different circumstances to help facilitate greater financial wellness, both in the long and short terms. 

So what are the areas of life in which a nonqualified account can be put to its best advantage? Here are some ideas.

Day to day expenses

Of course to cover the costs of daily living, you need a portion of your finances to be in liquid form. Standard checking and savings accounts with trustworthy banks and credit unions are an ideal way to store and access money easily and on a regular basis.

To get a little extra bang for your buck, you might consider researching banks or CUs that offer benefits for banking with them, such as a higher-yield savings account.

Goal-oriented savings

If you’re squirreling away assets in preparation for a big purchase, you want an account that you can withdraw from penalty-free when you make it. A standard savings account or Brokerage account with majority liquid investments can help you stash funds for a new car, a house downpayment, your child’s college, etc.

Emergency savings

One of the worst things you can do to your retirement account is dip into it in the event of an emergency. And you might have no choice – but withdrawals now mean less for you later. However if you want to maintain a separate emergency next egg that you can access free of taxation or penalty, a nonqualified savings account either in the form of a bank savings or Brokerage account strictly to fund the unexpected is an excellent option.

Nonqualified accounts: What’s next?

There exists a myriad of account options that can help you save for all the financial eventualities life has to throw at you. It can be overwhelming to figure out how to work all these ends to your best advantage, but it is well worth the effort in the end. While you continue to save for retirement, a nonqualified account can give you the flexibility you need to securely save for the day to day.

And Origin can help professional teams to build financial literacy and get even more out of their saving and investment efforts. Sign up for a free demo today.


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