It’s important to understand the impact of qualified money on your retirement account

One of the most important distinctions in estate planning is whether one’s assets are “qualified” or “non-qualified.”  The distinction comes from their treatment by the IRS.  Qualified assets are those that qualify for special tax treatment.  Specifically, the IRS allows individuals to put money in an investment account and either deduct the amount from their taxes or, in the case of an employer sponsored retirement plan like a 401(k) or 403(b), transfer the money to the account before any taxes are paid.  Money set aside in these qualified accounts then grows free of any interest, dividend or capital gains taxes.  It is only when the money is withdrawn that taxes are paid.  In the case of a qualified account, the amount withdrawn is taxed as ordinary income.  For the most part, it is taxed the same as your wages or salary.   Since the United States uses a progressive tax code, the amount of tax you pay on qualified withdrawals depends on your overall income.  The higher your income, the higher the marginal tax rate you will pay.  Another feature of qualified accounts is that the government requires that you begin to withdraw money from a qualified account when you reach the age of 70½.  This requirement, called an RMD or Required Minimum Distribution insures that the government eventually will collect the taxes that have been deferred during the time of accumulation.  In addition to the 401(k), 403(b) and IRA, there are other qualified accounts such as a 457, SEP IRA, and Simple IRA. Non-qualified accounts are those that do not qualify for special tax treatment by the IRS.  They are registered either as a single brokerage account, individual brokerage, joint brokerage or trust. The money in a non-qualified account has already been taxed.  Because it’s after-tax money, no income tax has to be paid when it is withdrawn.  However, any interest, dividends or capital gains that the account generates are… | Read More »