Qualified Accounts
Qualified accounts receive the benefit of tax deferral on the investment earnings and gains from sale of investments not distributed. Examples are employer savings plans such as 401K, or individual retirement accounts (IRA’s). Tax deferral enhances the powerful effect of compounding growth:
Traditional IRA’s – Created by individual contributions. Distributions are taxed at ordinary income tax (10% penalty applies if taken before 59½). Minimum distributions from IRA are required beginning no later than April 1, following the year you turn 70½.
Rollover IRA’s – Investments that are rolled over from either an employer plan (401K) or from another IRA. Contributions, tax impact on distributions, and minimum distribution rules are the same as they are for Traditional IRA’s.
Beneficiary IRA’s – Investments inherited from deceased owner of an IRA. Non-Spouse beneficiaries cannot contribute to a beneficiary IRA and must begin distributions or withdraw money soon after the death of the IRA owner. Spouses who are beneficiaries have more options – rollover into their own, for example.
Roth IRA’s – Investments that allow tax free distributions of earnings from the account once certain conditions are met: a) must wait at least 5 years from contribution, and b) must be at least 59½. However, while the earnings are non-taxable, the contributions are not tax deductible.
College 529 Plans – Investments that are similar to Roth IRA’s in that the distribution from earnings are tax free provided the funds are used for higher education purposes. Contributions are not deductible.
Non-Qualified Accounts
Individual Accounts – Taxable investment accounts. Since these accounts generate taxable income on earnings and gains of sales, focusing on tax-savings strategies while maintaining long-term growth objectives can be challenging. If you have both qualified and non-qualified accounts, there are also potential tax savings depending on which account specific investments are placed. For instance, a bond which pays semiannual interest may be best suited to the qualified, tax-deferred accounts.
Joint Accounts – Taxable Accounts that are set up jointly with a spouse or another individual. Titling of the accounts can have an impact on family transfer goals and tax basis following the death of one of the joint owners.
Trust Accounts – Family trust accounts are taxable non-qualified accounts (revocable living trusts or irrevocable trusts). Living trust accounts can ensure that your assets pass to your desired beneficiaries without the need for probate and provide management of assets in the event of you or your surviving spouse's incapacity.