If you have money in an account, chances are that you have at least one non-qualified account. What does it mean to be “non-qualified?” Don’t let the name fool you into thinking it’s a bad thing. Being non-qualified simply refers to “not qualifying” for any tax benefits. Any money you place into a non-qualified account has already been taxed, and any growth on your money is taxed too. While there are no tax advantages, there are good reasons to use non-qualified accounts.
Because non-qualified accounts do not receive tax benefits, there is no limit to how much you can place in these accounts. You also have the freedom to withdraw money as you please, when you please. On the other hand, qualified accounts, such as 401(k) plans or IRAs or 529 Plans, trade tax advantages for restrictions.
There are many non-qualified accounts, but the most common ones are checking or savings accounts at the bank. If you prefer to invest your money, you can use a non-qualified brokerage account to place all your investments (i.e. stocks, bonds, mutual funds). These are just a few examples of non-qualified accounts.
When it comes to qualified vs. non-qualified accounts, it really depends on how you plan to use that money in order to decide which account is right for you. If you need flexibility to withdraw money at any time, non-qualified accounts offer that flexibility. If you have time to allow your money to grow tax-deferred, then a qualified account might be more appropriate. Neither is good nor bad, and you can even use both at the same time!
Homework: Non-Qualified or Qualified? Take a look at your own accounts, and determine which is which. If you have non-qualified accounts, does it make sense for your money to stay in those accounts? What about your qualified accounts?