What is qualified dividends

what is qualified dividends

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The Facts

Qualified and non-qualified money status is determined by both the type of account and the method employed to deposit money in the account. Both account types typically have the same provisions and regulation restrictions, making identification of the qualification sometimes difficult

Types

In both qualified and non-qualified accounts, money deposited may accumulate on a tax-deferred basis. This means that any interest earned or growth in the account will not result in a taxable gain for that year. Instead, the income tax that would have been due on the growth is deferred until the money is withdrawn at a later date.

Money deposited into a retirement account such as a traditional IRA will receive tax-qualified status for the account owner. The amount of the contribution will result in a dollar-for-dollar deduction off the individual’s income tax return. Conversely, money deposited into a bank CD or annuity that is not an IRA will still grow on a tax-deferred basis, but the account owner will not receive a tax deduction for contributions into the account.

Effects

Funds in a qualified retirement account grow without tax liability until the account owner withdraws them. At that time, the amount of the withdrawal creates a dollar-for-dollar increase on the individual’s income tax return. However, in a non-qualified retirement account, since income taxes were already paid on the initial deposit amount, when withdrawals are made only the portion of the

funds that represent growth will be added to the individual’s income taxes for that year.

Considerations

Taxes may be a major factor in determining whether to deposit money into a qualified or non-qualified account. Deductions for contributions into qualified accounts may result in a reduction of the individual’s taxable income that is sufficient to drop that person into a lower tax bracket for the year. If the lower tax bracket would result in worthwhile savings or additional refund amounts, then qualified contributions may be more appropriate. However, if the tax deductions from retirement account deposits are not significant enough to drop the account owner into a lower tax bracket, or if such a reduction is not important, then non-qualified contributions may make more sense. By paying the taxes on a portion of retirement assets today, rather than in the future, the account owner reduces future taxes.

Potential

Taxes are the main focus when deciding whether to contribute to a qualified or non-qualified retirement account. Those individuals whose income puts them on the cusp of one tax bracket may elect to deposit money into qualified retirement accounts to take advantage of the dollar-for-dollar income tax deduction. Regardless of whether an account is qualified or non-qualified, the money will grow tax-deferred until it is withdrawn. Those people who are concerned about their ability to live comfortably on their retirement savings may wish to contribute to non-qualified accounts to reduce their future tax liability.

Source: ehow.com

Category: Bank

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