DEFINITION of 'Non-Qualifying Investment'

A non-qualifying investment is an investment that does not qualify for any level of tax-deferred or tax-exempt status. Investments of this sort are made with after-tax money. They are purchased and held in tax-deferred accounts, plans or trusts. Returns from these investments are taxed on an annual basis.

BREAKING DOWN 'Non-Qualifying Investment'

Some examples of investments that do not usually qualify for tax-exempt status are antiques, collectibles, jewelry, precious metals and art. Other investments that may not qualify for any sort of tax precedence are stocks, bonds, REITs and any other traditional investment that is not bought under a qualifying investment plan or trust.

How Non-Qualifying Investments Are Used

Annuities represent a common example of non-qualified investments. Over time, the asset may grow with deferred taxes pending withdrawal. For non-qualified annuities, when they are cashed out and surrendered, the first money to come out of the account is treated as earnings for the account holder for tax purposes.

If the account holder also withdraws the money originally invested, known as the cost basis, that portion is not taxed again because those taxes were already paid.

There are certain exceptions on how taxes are paid out on non-qualified investments. For instance, if the account holder takes a predetermined annuity payout, part of that payment may be considered to be a portion of the original investment and thus not subject to taxation again.

With non-qualifying investments, typically the investor is under no annual restrictions on the amount they can put towards such assets. This can offer more flexibility in some regards compared with qualifying investment accounts, which typically have maximum amounts that may be contributed depending on the type of asset. For instance, employee 401(k) contributions have an annual maximum contribution that can be made towards their plans. The limit may change to some degree, determined by the Internal Revenue Service. A non-qualifying investment can see any size contribution made over the course of each year according to the account holder’s strategy for saving.

Account holders can also make withdrawals on non-qualifying investments when they want, thought they will pay tax on interest and other gains such as appreciation that have accrued. There might also still be early withdrawal penalties if the account holder takes cash from certain types of assets before the account holder reaches a certain age, typically 59 ½. Also, they might be required to start making withdrawals from their non-qualifying investment accounts when they reach a certain age, often 70 ½.

RELATED TERMS
  1. Qualified Annuity

    A qualified annuity is a financial product that accepts and grows ...
  2. Qualifying Investment

    An investment purchased with pretax income. Money invested in ...
  3. Tax Deferred

    Investment earnings such as interest, dividends or capital gains ...
  4. Non-Qualified Distribution

    1) A distribution from a Roth IRA that occurs before the Roth ...
  5. Deferred Annuity

    A deferred annuity is a type of annuity contract that delays ...
  6. Wraparound Annuity

    A type of annuity that allows the investor (the holder of the ...
Related Articles
  1. Personal Finance

    Cashing Out Your IRA, 401(k) or 529 Plan

    What happens if you don't use money saved in an IRA, 401(k) or 529 for it's designated purpose?
  2. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  3. Retirement

    Retirement Savings: Tax-Deferred or Tax-Exempt?

    There are advantages and disadvantages to both types of retirement accounts. Find out which is right for you.
  4. Taxes

    Minimize Taxes With Asset Location

    Learn how to maximize your investment returns with this tax-minimization strategy.
  5. Retirement

    How Yearly Taxes on 401(k) Accounts Work

    Learn how your contributions to traditional or Roth 401(k) accounts are taxed, either in the year of contributions or at withdrawal, depending on the type.
  6. Retirement

    How Tax-Deferred Savings Boost Retirement Income

    One of the best ways to accumulate funds for retirement is to use tax-deferred savings vehicles.
  7. Investing

    The Best Investment Accounts for Young Investors

    What are the best investment accounts for young investors? A few types to consider.
  8. Retirement

    Not All Retirement Accounts Should Be Tax-Deferred

    It may be better to leave your assets exposed to the tax man when you're saving to retire.
  9. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center