What are Non-qualified Funds?
Non-qualified funds are assets held in investment accounts that do not qualify for the tax benefits provided to IRS-recognized retirement plans, such as 401(k)s or IRAs. This means that while the funds in these accounts can grow through investments, they are subject to standard taxation on gains, interest, and dividends during the investment period, rather than upon withdrawal. These accounts are typically funded with after-tax income, making them distinct from qualified accounts funded with pre-tax income.
Individuals often use non-qualified funds to supplement retirement savings, as there is no limit on contributions or mandatory withdrawal age associated with these accounts. Examples of non-qualified funds include savings accounts, brokerage accounts, and other investments that do not have the tax-deferred status of traditional retirement accounts.
In the context of life insurance, non-qualified funds can be used as a source of premium payments for various insurance products, such as Indexed Universal Life (IUL), Whole Life, Term Life, and Senior Life Insurance. Policyholders may leverage these funds to support cash value life insurance policies that provide a death benefit along with a savings component.
One of the advantages of non-qualified funds is the flexibility they offer. Investors can access these funds without facing early withdrawal penalties, making them useful for both planned and unexpected expenses. However, unlike qualified accounts, non-qualified accounts lack tax-sheltered growth, which could lead to a higher tax burden on investment earnings over time.