Non-retirement investing: What to invest in outside retirement accounts

Retirement accounts, also known as “qualified investment accounts,” are where most people do the bulk of their investing. However, if you’re maxing out your IRA and 401(k) contributions and have extra income to invest, it may be time to look at non-qualified investment accounts.

What is a non-qualified account?

A non-qualified account is a savings or investment account that’s funded with after-tax dollars.  Examples of non-qualified accounts include brokerage accounts, savings and checking accounts, trust accounts, and custodial accounts, to name a few.

How does a non-qualified account compare to retirement accounts?

Retirement accounts are considered qualified accounts because they qualify for beneficial tax treatment:

• Contributions are either pre-tax or tax-deductible. 
• Earnings are tax-deferred until you take money out of the account.

Retirement accounts have annual contribution limits and penalties for early withdrawal, generally before you reach the age of 59 ½. Qualified accounts include employer-sponsored retirement plans like 401(k)s and 403(b)s. Traditional and Roth IRAs are also considered qualified due to the annual contribution limits and preferential tax treatment.

Types of non-qualified, non-retirement investment accounts

The most common type of non-retirement investment account is a brokerage account. Brokerage accounts are non-qualified, taxable investment accounts that can include vehicles like stocks, bonds, mutual funds and exchange-traded funds (ETFs). You can open an individual or joint brokerage account through a licensed broker or on your own (referred to as a self-directed brokerage account).

While education accounts (such as a 529 plan) and health savings accounts (HSAs) are also considered non-retirement accounts, they have different purposes, investment options and/or tax treatments than a brokerage account.

Get more details on opening and investing in 529 plans and HSAs.

Benefits of a brokerage account

One benefit of a brokerage account is the amount of control you have over them. With employer plans, you may be limited by what investments are available to that plan. A brokerage account, on the other hand, allows you to choose your own investments.

Another benefit 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 earnings are typically subject to capital gains tax.

Finally, there are no limits on how much money you can contribute each year to a brokerage account.

How are brokerage accounts taxed?

Brokerage accounts are taxable, as they’re funded with after-tax money. You’ll pay taxes on the income you earn from yearly dividends or interest, as well as capital gains when you sell stocks. There are no limits to how much you can invest in them, making a traditional brokerage account a good option if you’ve maxed out contributions to your retirement accounts.

This is just a snapshot of the attributes of this type of account. Because of the complexities of each type of investment, it’s important to talk to a financial professional to ensure that your portfolio is as tax efficient as possible.

Are you ready to invest in a brokerage account?

Before you start investing in a brokerage account, first consider funding the following financial priorities:

• Have at least three to six months' worth of emergency funds set aside in a savings account.
• Take full advantage of a company match in your employer-sponsored retirement plan. Many employers will match your contributions up to a certain percentage.
• Invest enough in your retirement accounts to meet your post-retirement goals.
• If you have children or grandchildren, fund a 529 plan for their future education.
• If you have access to one, fully fund a health savings account.

Considerations when choosing a brokerage account

Ready to invest in a brokerage account? You should consider the following when determining the right investments for you:

• Fees: Brokerage accounts have variable fees related to the amount of engagement required to open and maintain them. Brokerage fees can come in different forms from asset management fees to commissions on transactions.
• Risk tolerance: Risk tolerance is the degree of market volatility you’re willing to accept as an investor. There are generally a few key questions that can help you identify how comfortable you are with risk, which in turn can help you develop your investment strategy.
• Time horizon: Are you investing to meet short- or long-term financial goals? The shorter the timeframe, the less volatile you want the investments to be. The longer the duration, the more able you’ll be to take some of those risks to potentially yield a higher return on your investment.

Finding the right mix between retirement and non-retirement investments isn’t a one-size-fits-all proposition. Your personal goals, risk profile and time horizon mean that the portfolio that’s right for you is unique. However, having a diverse mix of investment accounts may provide more options to help you work toward your goals.

From investing online to working with a financial professional, learn more about your investing options.