For most people, retirement accounts are where they do the bulk of their investing, and it’s important to take full advantage of them. However, if you’re maxing out your contributions and have extra income to invest, it may be time to look at additional options.
As a group, retirement accounts are known as “qualified” investments because they qualify for beneficial tax treatment:
Retirement accounts have annual contribution limits and penalties for early withdrawal, generally before you reach the age of 59½. Qualified accounts include employer-sponsored retirement plans like 401(k)s and 403(b)s. Individual retirement accounts (IRAs) are also considered qualified due to the annual contribution limits and preferential tax treatment.
One reason employer-sponsored plans are popular is that many employers match contributions, up to a limit. However, there’s another reason most people invest primarily through retirement accounts.
“Folks are comfortable investing in their 401(k)s or 403(b)s because the funds come out of their paycheck automatically. They don’t really have to think about it,” says Jake Kujala, vice president and group product manager at U.S. Bank Wealth Management. At a certain point, convenience becomes inertia and, as Kujala says, “folks just tend to put off” looking into other investments.
Non-retirement investments are “non-qualified,” which means you’re investing with after-tax dollars and not subject to special tax treatment. If you’re maxing out your 401(k) contribution and want to keep investing, that’s where non-qualified accounts may come into play.
One benefit of non-qualified investments is the amount of control you have over them. With employer-sponsored plans, you may be limited by what investments are available to that plan. Non-retirement accounts, on the other hand, allow you to choose your own investments.
Another benefit, according to Kujala, is tax diversification. “Non-qualified accounts allow you to be more strategic about how and when you access your money.” Retirement accounts have rules around and penalizations for withdrawing money before you reach a specific age, generally 59 ½. With non-qualified accounts, you can withdraw money at any time, although any earnings are subject to capital gains tax.
Finally, there are no limits on how much money you can contribute each year to non-qualified investment accounts.
Popular non-retirement investments
Options abound when it comes to non-qualified accounts. Here are some common types:
Ready to invest beyond your retirement accounts? You may want to work with a financial professional to create and tailor a portfolio to reflects your financial goals. You should consider the following when determining the right investments for you:
When it comes to finding the right allocation mix between retirement and non-retirement investments, Kujala says, “We make our decisions client by client. There’s no rule of thumb, but some diversification is key.”
Your mix of retirement and non-retirement investments should evolve throughout your life. Learn more about different investment strategies by age.