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1099 Tax Form – A form filed with the IRS which reports,
among other things, capital gains and/or dividends from its issuer.
Form 1099-R is one type of Form 1099 and reports distributions (whether
rolled over or not) form IRAs and certain types of plans.
5498 Tax Form – A form filed annually with the IRS which
reports the amount of IRA contributions and the fair market value
of the IRA.
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401(k) Plan – A tax-qualified retirement plan which allows
employees to contribute a before-tax portion of their salary. In
general, one of three events can make 401(k) plan benefits eligible
for rollover to an IRA: 1) termination of employment; 2) termination
of the 401(k) plan (without a "successor" plan; 3) the
employee's attainment of age 59½. The plan document or plan
administrator should be consulted to determine if it permits a rollover
in a particular case.
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403(b) Plan – A tax-favored retirement plan which may be
adopted by public schools or tax-exempt employers for its employees.
This type of plan, which is also called a tax-sheltered annuity
or tax-deferred annuity, works much like 401(k) and other tax-qualified
plans, and is generally subject to the same distribution and rollover
rules applicable to 401(k) plans (see above). The plan document
or plan administrator should be consulted to determine if it permits
a rollover in a particular case.
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Active Participant – An individual who,
in a particular year, benefited under a qualified pension, profit
sharing or stock bonus plan; a 403(b) plan; a SEP IRA; a SIMPLE
IRA or SIMPLE 401(k); a qualified annuity; any plan described in
IRC Sec 501(c)(18); or a plan established for its employees by the
U.S., by a state or political subdivision or by an agency or instrumentality
of the U.S. or a state or political subdivision (other than a plan
under IRC Sec 457(b)).
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Adjusted Gross Income (AGI) – All income received over the
course of a year (wages, interest, dividends, capital gains, etc),
after certain adjustments, including business expenses, alimony,
moving expense, as specified on IRS Form 1040.
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Annual contribution limits - The dollar amount that may
be contributed (other than through a rollover or conversion) to
an IRA for a year. The 2005 annual contribution limits for traditional
and Roth IRAs is $4,000 for individuals younger than 50, and $4,500
for individuals 50 and older, or if less, the individual's compensation
for the year. Different rules apply for determining annual contribution
limits for other types of IRAs.
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Carry-back Contribution – A contribution
made to a Roth or Traditional IRA between January 1 and April 15
for the prior tax year.
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Catch Up Contribution – An additional contribution available
for individuals age 50 and older. The IRA catch-up contribution
limit for 2005 is $500.
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Co-mingling - Combining funds from different sources one
account or investment, for example, combing amounts rolled over
from a qualified retirement plan and other IRA contributions in
the same IRA.
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Compensation - Amounts received for personal services, including
base salary, commissions, bonuses, overtime and vacation pay. For
self-employed individuals, compensation is net earnings from self-employment.
For purposes of determining the annual contribution limits for an
IRA, alimony and separate maintenance payments are treated as compensation.
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Conduit IRA - An IRA that holds only amounts rolled over
from a qualified retirement plan, 403(b) plan or similar plan, and
earnings on those amounts. Prior to recent changes in the tax laws,
amounts could be rolled over from an IRA to qualified retirement
plan only if the IRA was a conduit IRA. Recent tax law changes have
loosened this restriction.
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Contingent Beneficiary - The individual(s) and or entity(ies)
(e.g., trust, charity, estate) who will receive the proceeds of
a retirement account upon the account owner's death if all Primary
Beneficiaries are then deceased.
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Contribution - An amount contributed to an IRA for a particular
tax year. Contributions (other than rollover contributions) must
be made in cash or check and are subject to annual contribution
limits, depending on, among other things, the year and type of account.
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Contributory IRA - An IRA that has been funded by cash contributions
by the IRA owner, as opposed to funds rolled over from a retirement
plan or other IRA.
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Conversion - The change of a traditional IRA, SEP, or other
IRA funded with pre-tax funds (or a portion of any such IRA) to
a Roth IRA. A conversion is a taxable event.
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Coverdell Educational Savings Account- A tax-favored account
(formerly called an Education IRA) that is a trust or custodial
account established in the United States funded with post-tax contributions
to pay for the qualified education expenses of a designated beneficiary.
Earnings and withdrawals from a Coverdell account are tax-free if
used for those educational purposes. At the time of contributions,
the designated beneficiary must be under age 18 or a special needs
beneficiary. Total contributions from all contributors for any one
child may not exceed $2,000 per year. Contributions from individuals
whose adjusted gross income exceeds $95,000 ($190,000 for married
taxpayers filing joint returns) for the year are restricted. Amounts
contributed to a Coverdell account do not count against the annual
contribution limits for individual IRAs.
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Deductible/nondeductible - An individual's
contributions to a traditional IRA are tax deductible if he or she
is not an active participant in an employer's retirement plan. An
active participant still may deduct contributions to a traditional
IRA depending upon income and filing status. Contributions to a
Roth IRA are not deductible.
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Direct Rollover- A direct transfer of funds from a 401(k)
or other permissible retirement plan to an IRA. A direct rollover
avoids the 20% mandatory income tax withholding that would otherwise
apply if the funds were first paid to the employee.
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Disclosure Statement- A written statement that explains
in plain language the rules that govern an IRA. An IRA custodian
must provide a current disclosure statement to anyone who opens
an IRA.
Distribution - Any withdrawal of
cash or assets from an IRA account or retirement plan.
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Early Distribution - Distributions taken
from a Traditional or Roth IRA before age 59½. Early distributions
(also called pre-mature distributions) are subject to a 10% early
distribution penalty unless an exception applies.
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Earnings – Money earned yearly through IRA investments.
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Education IRA- See Coverdell Education Savings Account.
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Employer and Employee Association Trust Account, or Group IRA-
An IRA established by an employer, union, and other employee association
for its employees or members.
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Excess Contribution- The amount of an IRA contribution that
exceeds the annual contribution limit for the year. A 6% excise
(penalty) tax applies on the excess contribution each year until
corrected.
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Fair Market Value- The fair market value
is the value (generally, what a willing buyer would pay to a willing
seller) of an asset or assets of an IRA as of a certain date. The
December 31 fair market value of total IRA assets must be provided
to each IRA holder and the IRS each year.
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Indirect Rollover- A rollover to an IRA
from another IRA or 401(k) or other permissible retirement plan
that is not an direct rollover, i.e., distributed amounts are first
paid to the individual recipient. An indirect rollover generally
must be completed within 60 days.
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Individual Retirement Account (IRA)- A
tax-favored retirement account which an individual may establish
for himself or herself and complies with applicable tax rules. Earnings
grow tax-free within the IRA. IRA funds may be invested into a wide
range of assets ranging from public stocks and mutual funds to real
estate and private placements.
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Individual Retirement Annuity - An IRA established with
a life insurance company through the purchase of a special annuity
contract.
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Inherited IRA - An IRA acquired by the non-spousal beneficiary
of a deceased IRA owner. Special rues apply to an inherited IRA.
New contributions are not allowed to this IRA, and rollovers to
another IRA are not permitted (although direct transfers to another
IRA are allowed). Inherited IRA amounts must be distributed within
a period specified by the tax laws.
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Life Expectancy - The number of years an
individual is expected to live based on his or her current age and
applicable IRS tables.
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Modified Adjusted Gross Income (MAGI) -
Adjusted Gross Income (AGI), with the following added back: Income
from US Savings Bonds used to pay higher education; foreign earned-income
exclusion; foreign housing exclusion or deduction; half of Social
Security or tier 1 railroad retirement benefits; passive activity
losses and credits limited; employer reimbursed adoption expenses.
An individual's MAGI for any year will determine eligibility to
make a Roth IRA contribution for that year. For most individuals,
MAGI will be the same as AGI.
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Net Income Attributable - The amount of
income treated as earned by an excess contribution to an IRA.
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Nondeductible Contribution - A contribution made to a traditional
IRA and designated by the IRA holder as nondeductible either by
choice or because of restrictions on the ability to make a deductible
contribution. An income tax deduction is not taken for this contribution.
A nondeductible contribution must be reported on a Form 8606 filed
with the IRS.
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Ordering Rules - The order in which Roth
IRA amounts are deemed to be withdrawn under the tax rules. The
first amounts distributed are treated as returns of contributory
(after-tax) amounts, and are not taxed, regardless of which Roth
IRA distributes them or when the distribution is made. Once the
aggregate contributory amounts are distributed, distributions will
be made from earnings and will be tax-free only if certain conditions
are met.
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Primary Beneficiary - The individual(s)
and or entity(ies) (e.g., trust, charity, estate) who will receive
the proceeds of a retirement account upon the account owner's death.
See also Contingent Beneficiary.
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Probate - A court process to transfer a decedent's property
to his or her heirs or other beneficiaries.
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Profit Sharing Plan - A qualified retirement plan to which
an employer may, in its discretion, make contributions on behalf
of eligible employees.
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Prohibited Transaction - An improper transaction or event
involving an IRA or its assets that will result in excise (penalty)
taxes or possible loss of the IRA's tax-favored status.
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Qualified distribution (Roth IRA)
- A withdrawal from a Roth IRA that is made at least five years
after the owner's first Roth IRA was established AND
1. Made on or after the date its owner becomes age 59½; or
2. Made after the owner's death; or
3. Made after the owner becomes disabled within the definition of
tax laws; or
4. Used to pay for qualified first-time homebuyer expenses.
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Qualified Retirement Plan - A retirement plan that satisfies
requirements under the tax laws for tax-favored status. Employer
contributions made on behalf of eligible employees to a qualified
retirement plan are deductible when made. Earnings on those amounts
enjoy tax-deferred investment growth, and employees pay no tax on
their benefits until paid. Distributed benefits generally may be
rolled over to an IRA for additional tax-deferred growth and self-directed
investment choices.
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Recharacterization - An election to treat
a contribution made from a Roth IRA as having been made to a traditional
IRA or vice versa. Recharacterizations are not taxable but are reported
to the IRS.
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Reconversion - A conversion of an amount from a traditional
IRA to a Roth IRA, after that amount had previously been so converted
but later recharactrerized.
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Redesignation (aka Carry-forward) - The designation of an
IRA contribution originally intended to be made for one year as
made for a later year, usually because the contribution may not
be made for the year originally intended. A redesignation of en
excess contribution will not eliminate the applicable excise (penalty)
tax, but allows the contribution to remain in the IRA.
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Required Beginning Date- The date an IRA owner must begin
taking distributions from his or IRA (other than a Roth IRA). The
required beginning date is generally April 1 following the year
the IRA owner reaches age 70½. There is no required beginning
date for a Roth IRA.
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Required Minimum Distribution (RMD) - The minimum amount
which must be distributed in any year upon attainment of required
beginning date or after the IRA owner's death. The IRS has established
a simplified table to determine the required distribution based
on the applicable age and life expectancy. If required payments
are not timely made, the IRS may impose an excise (penalty) tax.
A Roth IRA is not subject to required minimum distributions until
after the Roth IRA owner dies.
Rollover - The tax-free transfer or deposit of amounts distributed
from a tax-favored retirement plan or IRA to a tax-deferred retirement
plan or IRA.
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Roth IRA - A type of IRA funded with nondeductible contributions
or amounts converted (and taxed) from another type of IRA. Qualified
distributions from a Roth IRA are free from income tax. Contributions
or conversions to a Roth IRA may be made only in years in which
the individual's modified adjusted gross income within specified
limits.
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Signature Guarantee - A stamp or seal provided
by a bank or member of a domestic stock exchange that guarantees
the authenticity of a signature. A notary public cannot provide
a signature guarantee.
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Simplified Employee Pension IRA (SEP-IRA)- A type of IRA
established by an employer which functions much like a qualified
retirement plan, but is subject to fewer rules and administrative
requirements. The maximum annual contribution amount for any employee
(including a self-employed individual) is 25% of compensation or
$42,000, whichever is less. (The IRS will increase the $42,000 periodically
to reflect changes in the cost of living.) Contributions are tax
deductible and earnings on growth are tax deferred. SEP-IRAs are
usually desirable for sole-proprietorships and other small businesses.
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SIMPLE IRA or SIMPLE 401(k) - A SIMPLE IRA is type of IRA
established by an employer which functions much like a 401(k) plan.
A SIMPLE 401(k) is a type of 401(k) plan, but subject to fewer rules
and administrative requirements. Under either type of SIMPLE, employees
can choose to contribute a portion of salary on a pre-tax basis,
and the employer is required to make contributions on behalf of
employees. Contribution limits are lower than under regular 401(k)
plans, and other restrictions apply. SIMPLEs are usually desirable
for small businesses who want to give employees the opportunity
to save on a pre-tax savings, but with fewer compliance requirements.
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Solo 401(k) - A 401(k) plan combined with a profit-sharing
plan, usually adopted by a sole proprietor or other business with
no non-owner employees. Because 401(k) contributions do not count
towards the limit on plan contributions which can be deducted (25%
of compensation), a solo 401(k) plan enables some self-employed
individuals to contribute and deduct more than under the 25% limit,
which would apply under a regular profit-sharing plan or SEP-IRA.
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Spousal IRA - A traditional or Roth IRA funded by a married
taxpayer in the name of his or her spouse who has insufficient compensation
to fund the maximum allowable annual IRA contribution. The couple
must file a joint tax return for the year of the contribution. The
working spouse may contribute up to the maximum annual limits to
both the spousal and his/her own traditional or Roth IRAs, provided
certain conditions are met.
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Spousal IRA Contribution - A contribution to a spousal IRA.
The maximum spousal IRA contribution for 2005 is $4,000 ($4,500
if age 50 or older). The deductible amount may be limited if one
spouse was an active participant and the couple's combined AGI for
the year exceeded specified limits.
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Tax and penalty-free withdrawals - A withdrawal
(or distribution) from an IRA that is not subject to income taxes
or penalties. A distribution from an IRA that is rolled over back
to an IRA within 60 days is an example (although this is permissible
only once every 12 months per IRA). A distribution from a Roth IRA
that meets certain conditions is another example.
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Tax-deferred investment growth - Earnings growth which is
not income-taxed while in the IRA but taxed when distributed from
the IRA. For example, if an IRA buys an asset and later sells it
for a gain, the gain is not then taxed, as it generally would be
if owned outside the IRA. All the proceeds can then be re-invested,
and income taxes are paid when amounts are distributed.
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Tax-free investment growth - Earnings growth which is never
income-taxed, even when distributed out of the IRA. Tax-free investment
growth is possible within a Roth IRA, provided certain conditions
are met.
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Traditional IRA - An IRA which is not a ROTH, SEP or SIMPLE
IRA.
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Transfer - The movement of a retirement account assets from
one custodian directly to another. An asset transfer is not a distribution
and is not taxable or reportable to the IRS. There are no limits
as to the number or frequency of IRA transfers.
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Unrelated Business Taxable Income - Income taxable to an
IRA (or other tax-exempt entity) because it is "unrelated"
to the IRA's tax-exempt purpose. Typical examples are income from
a manufacturing, sale or service business operated by an IRA or
a partnership or LLC in which an IRA is a member, as well as unrelated
debt-financed-income. The tax on this income is called unrelated
business income tax, or UBIT.
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Unrelated Debt-financed Income - Income taxable to an IRA
(or other tax-exempt entity) which is attributable to borrowing,
either by the IRA directly or a partnership or LLC of which it is
a member. Typical examples are income from real estate purchased
with borrowing and securities bought on margin. Unrelated debt-financed
income is a type of unrelated business taxable income.
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Withdrawal – see Distribution
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