IRA Glossary
- 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)).
- 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.
- Annual Contribution Limits
- The dollar amount that may be contributed (other than through a rollover or conversion) to an IRA for a year. The 2009 annual contribution limits for traditional and Roth IRAs is $5,000 for individuals younger than 50, and $6,000 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.
- Carry-back Contribution
- A contribution made to a Roth or Traditional IRA between January 1 and April 15 for the prior tax year.
- Catch Up Contribution
- An additional contribution available for individuals age 50 and older. The IRA catch-up contribution limit for 2009 is $1,000.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Earnings
- Money earned yearly through IRA investments.
- Education IRA
- See Coverdell Education Savings Account.
- 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.
- 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.
- 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.
- 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.
- 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.
- Individual Retirement Annuity
- An IRA established with a life insurance company through the purchase of a special annuity contract.
- Inherited IRA
- An IRA acquired by the non-spousal beneficiary of a deceased IRA owner. Special rules 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.
- Life Expectancy
- The number of years an individual is expected to live based on his or her current age and applicable IRS tables.
- 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.
- Net Income Attributable
- The amount of income treated as earned by an excess contribution to an IRA.
- 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.
- 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.
- 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.
- Probate
- A court process to transfer a decedent's property to his or her heirs or other beneficiaries.
- Profit Sharing Plan
- A qualified retirement plan to which an employer may, in its discretion, make contributions on behalf of eligible employees.
- 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.
- 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
- Made on or after the date its owner becomes age 59½
- Made after the owner's death
- Made after the owner becomes disabled within the definition of tax laws
- Used to pay for qualified first-time homebuyer expenses
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 $49,000, whichever is less. (The IRS will increase the $49,000 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.
- 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.
- 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.
- 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.
- Spousal IRA Contribution
- A contribution to a spousal IRA. The maximum spousal IRA contribution for 2009 is $5,000 ($6,000 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.
- 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.
- 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.
- 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.
- Traditional IRA
- An IRA which is not a ROTH, SEP or SIMPLE IRA.
- 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.
- 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.
- 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.
- Withdrawal
- see Distribution
- 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.
- 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.
- 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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