What Is a Non-Registered Investment Account?

A non-registered investment account, often called a taxable or open account, is a general-purpose vehicle for holding and trading financial assets. Offered by brokerage firms, these accounts allow individuals to buy and sell securities without the specific rules associated with retirement or education savings plans. Unlike accounts created for specific goals like retirement, a non-registered account has a direct and uncomplicated structure. Any income generated within the account is subject to tax in the year it is received, making it a versatile tool for various financial objectives.

Key Characteristics and Rules

A characteristic of a non-registered account is the absence of contribution limits. Investors can deposit as much money as they wish, whenever they choose, without the annual maximums imposed on Individual Retirement Arrangements (IRAs) or 401(k) plans. This allows for flexibility, accommodating large, lump-sum investments from an inheritance or the sale of a business.

Another rule is the unrestricted access to funds, as money can be withdrawn at any time and for any reason. Accessing these funds may require selling assets, which can trigger tax consequences like capital gains tax. This differs from retirement accounts, which may impose a 10% early withdrawal penalty for distributions before age 59 ½. The account’s liquidity makes it suitable for financial goals that arise before retirement, such as building a down payment for a home or saving for a major purchase.

Types of Assets Held

A wide array of financial instruments can be held within a non-registered investment account, allowing investors to construct a diversified portfolio. Common asset types include:

• Stocks, which represent ownership shares in a publicly traded company and give the investor a claim on its assets and earnings.
• Bonds, which are effectively loans made to a corporation or government body that pay periodic interest and repay the principal at maturity.
• Mutual funds, which pool money from many investors to purchase a large, diversified portfolio of stocks, bonds, or other securities.
• Exchange-traded funds (ETFs), which hold a basket of assets similar to a mutual fund, but their shares trade on a stock exchange like individual stocks.

Taxation of Investment Income and Gains

The tax treatment of earnings is an important aspect of managing a non-registered account. All income and realized gains are reported to the investor and the Internal Revenue Service (IRS) annually, with tax implications differing based on the type of return.

Taxation of Capital Gains

When an investment is sold for more than its purchase price, the profit is a capital gain. The tax rate applied depends on how long the asset was held. If held for one year or less, the profit is a short-term capital gain and is taxed at the investor’s ordinary income tax rate. An asset held for more than one year qualifies as a long-term capital gain and is taxed at preferential rates of 0%, 15%, or 20%, depending on the investor’s taxable income.

Higher-income investors may also be subject to an additional 3.8% Net Investment Income Tax on their capital gains. Brokerage firms report these sales to investors on Form 1099-B. These sales are detailed on Form 8949, with the totals then carried over to Schedule D of Form 1040.

Taxation of Dividends

Companies may distribute a portion of their earnings to shareholders as dividends, and this income is taxable. The tax treatment depends on whether the dividends are classified as qualified or non-qualified. Qualified dividends are taxed at the lower long-term capital gains rates, while non-qualified dividends are taxed at the investor’s higher ordinary income tax rate. Dividend income is reported to investors on Form 1099-DIV.

Taxation of Interest

Interest income, such as that earned from corporate or government bonds held in the account, is taxed as ordinary income. This means it is subject to the same federal tax rates as an individual’s wages or salary. This income is reported by the brokerage firm to the investor on Form 1099-INT.

Account Opening and Funding Process

Opening a non-registered investment account is a straightforward process that begins with gathering personal and financial information. An individual should have their Social Security Number, date of birth, a valid mailing address, and contact information available. To comply with federal regulations, brokerage firms also require information about an individual’s employment status and income. For funding the account, the applicant will need their bank’s routing number and their checking or savings account number.

With the required information compiled, the next step is to select a brokerage firm and complete its online application. After the application is submitted and approved, the final action is to fund the account. This is most commonly done via an Automated Clearing House (ACH) transfer from the linked bank account, though other methods like wire transfers or mailing a check are often available.