Nonqualified Accounts: The Swiss Army Knife

Mack Courter |

This month, we’re covering the three main categories for retirement saving.  Last week, we covered the Traditional IRA:  Today, we’re going to talk about the one that gets no respect.  It’s the nonqualified or taxable account, which I like to describe as the Swiss Army Knife of retirement planning. 

There are some people who can be dropped in the wilderness with nothing more than a Swiss Army Knife, and they will survive.  Unfortunately, I’m not one of them.  I do love my knife however, because of its versatility.  Around the house, I find myself using it all the time.  I’m constantly cutting up boxes and tightening screws with the screwdriver.  I’ve even used the saw blade to trim some scrubs. 

When it comes to retirement planning, nonqualified accounts are the most versatile investment you can have.    


Every type of investment account falls into one of these three categories to the left.  Today, we’re going to focus on the taxable category.

Just about any investment that is not some sort of retirement plan or annuity falls into the taxable category.  It can be a bank checking or savings account, CD, brokerage account, mutual funds, stocks, and bonds. 

When you contribute money to a taxable account, you don’t get a tax deduction.  While you own the investment, any interest, dividend, or other distribution is usually taxable.  When you sell the investment, you pay taxes if you have a gain.  You get a deduction if you have a loss. 

Here are 10 facts you should know about Nonqualified Accounts:

  1. There are no limits to the amount of money you can save in a nonqualified account.
  2. There are virtually no restrictions to the type of investment you hold in a nonqualified account. 
  3. You can withdraw money from the account at any time for tax purposes.  There may be restrictions or penalties levied by the investment company however.  
  4. Interest and ordinary dividends are taxed at your ordinary income tax rate.  So if you are in the 15% bracket, you’ll pay 15% on these distributions.  If you’re in the 25% bracket, you’ll pay 25%.
  5. Qualified dividends, which are dividends that meet certain criteria, are not taxed if you are in the 15% bracket or below.  They are taxed at a maximum of 15% for higher brackets.
  6. If you sell a taxable investment for a gain within a year of purchasing it, you’ll owe short term capital gains tax.  The tax is equal to your regular income tax bracket.
  7. If you sell a taxable investment for a gain after holding it at least 12 months, it qualifies as a long term capital gain.  This means that it’s not taxable if you’re in the 15% or lower brackets, and a 15% tax if you are in the 25% or higher brackets.
  8. If you sell an investment at a loss, you can use the loss to offset any gains you incur on another investment sale.  You can carry these losses forward to apply to gains in future years.
  9. You may also deduct up to $3,000 per year in losses off your regular earned income. 
  10. When you pass away, your heirs will receive the nonqualified accounts with a step up in basis.  This means that the fair market value of the account on your date of death will become their starting point for tax purposes.  They could sell the investment that day, and not pay a cent of capital gains tax.  Inheritance and estate taxes may still apply.