What Are Non-Qualifying Investments?
A non-qualifying investment refers to an investment that doesn’t benefit from tax-deferred or tax-exempt status. Simply put, these investments are funded with after-tax money and are held in tax-deferred accounts, plans, or trusts. The investment returns are subjected to annual taxation.
Key Takeaways
- A non-qualifying investment does not offer any tax advantages.
- Common examples include annuities, antiques, collectibles, jewelry, precious metals, and art.
- These investments are held in tax-deferred arrangements and their returns are taxed annually.
The Significance of Non-Qualifying Investments
One of the most notable examples of non-qualifying investments is an annuity. As the invested asset appreciates in value over time, its taxes are deferred until withdrawals are made. When cashed out, the earnings on the annuity are taxed, while the original investment amount, often referred to as the cost basis, is not taxed again.
Another feature of non-qualifying investments is the flexibility they offer. Investors are typically not bound by annual contribution limits imposed on qualifying investments. For instance, contributions to a non-qualifying account can exceed the yearly caps set for a 401(k) plan. Withdrawals from non-qualifying investments are also less restricted, although interest and gains are taxed, and early withdrawal penalties may apply.
It’s important to note that non-qualifying accounts may have mandatory withdrawal ages, commonly at 70½ years, similar to many retirement accounts.
Example: Types of Non-Qualifying Investments
Here are some assets that usually fall under non-qualifying investments:
- Antiques and Collectibles: Items like rare coins, stamps, and fine wine are typically bought with post-tax money and do not provide tax-deferred growth.
- Jewelry: High-value personal items, such as diamonds and watches, fall into this category.
- Precious Metals: Investments in gold, silver, platinum, and palladium often do not enjoy tax-exempt status.
- Art: Original pieces of art and sculptures are non-qualifying investments.
- Other Traditional Investments: Stocks, bonds, and REITs when not held in a qualifying account or trust may also be considered non-qualifying investments.
By understanding the nature and implications of non-qualifying investments, you can make more informed choices that align with your overall financial strategy.
Related Terms: Cost Basis, Tax-Exempt Status, Qualified Investments, 401(k), REITs.
References
- Internal Revenue Service. “Publication 575 (2020), Pension and Annuity Income”.
- Internal Revenue Service. “Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits”.
- Internal Revenue Service. “2020 Instructions for Schedule D (2020)”.
- Internal Revenue Service. “Instructions for Form 1120-REIT (2020).”
