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Glossary

A-C

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 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 personally (other than through a rollover or conversion) to an IRA for a year.

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.

Co-mingling

Combining funds from different sources into 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.

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 also deceased.

Contribution

An amount of personal funds 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 received 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.

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D-F

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 movement 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 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 to accountholder or beneficiaries, which generates a 1099-R tax form.

Early distribution

Distributions taken from a Traditional or Roth IRA before age 59½. Early distributions (also called premature distributions) are subject to a 10% early distribution penalty unless an exception applies.

Earnings

Money earned 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. (This is not a joint account for employees / members. IRAs are established for each employee individually.)

Excess contribution

The amount of an IRA contribution that exceeds the annual contribution limit for the year.

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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G-P

Indirect rollover

A rollover to an IRA from another IRA or 401(k) or other permissible retirement plan that is not a direct rollover - that is, 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 that 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, private equity and promissory notes.

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.

Net income attributable

The amount of income treated as earned by an excess contribution to an IRA.

Primary beneficiary

The individual(s) and/or entity(ies) (e.g., trust, charity, estate) which 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, at 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.

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Q-Z

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 reaches age 59½
  2. Made after the owner's death
  3. Made after the owner becomes disabled within the definition of tax laws
  4. Used to pay for qualified first-time homebuyer expenses

Qualified Retirement Plan (QRP)

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 an IRA or Roth 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 or SEP IRA to a Roth IRA after that amount had previously been so converted, but later recharactrerized.

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, typically no later than the year the IRA owner reaches the age of 70½, 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 movement or deposit of amounts distributed from a tax-favored retirement plan or IRA to a tax-favored 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.

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. A medallion signature guarantee also guarantees the dollar amount of the transaction and therefore may also be FDIC insured.

Simplified Employee Pension IRA (SEP IRA)

A type of IRA established by an employer of firms with 25 or fewer employees that functions much like a qualified retirement plan, but is subject to fewer rules and administrative requirements.

Solo 401(k) or Solo(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.

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.

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 to the IRA owner or beneficiary.

Tax-free investment growth

Earnings growth that 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. (Please check with your tax professional for details).

Traditional IRA

An IRA which is not a ROTH or SEP.

Transfer

The movement of 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 (UBTI)

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

Any withdrawal of cash or assets from an IRA account or retirement plan to accountholder or beneficiaries, which generates a 1099-R tax form.

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0-9

1099 and 1099-R Tax Forms

A form filed with the IRS that 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) from IRAs and certain types of plans.

5498 Tax Form

A form filed annually with the IRS, which reports the amount of IRA contributions or rollovers 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 salaries. 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. Consult the plan document or plan administrator 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). Consult the plan document or plan administrator to determine if it permits a rollover in a particular case.

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