Glossary of Terms
AGI (Adjusted Gross Income) – All the money earned in a calendar year, less certain adjustments for alimony, moving expenses, deductible retirement-plan contributions and other deductions.
Annual Contribution Limits – The amount of money allowed for contribution to an IRA each year. Annual contributions to a Roth IRA, for example, are limited to a maximum annual amount minus the taxpayer’s traditional IRA contributions.
Contributions – In addition to annual contributions, qualified IRA contributions also include “conversions” to a Roth IRA. These rollover funds are treated as additional contributions with applicable IRA regulations.
Distributions (Withdrawals) – Any amount of funds taken out of the IRA account. Traditional, Roth, SEP or SIMPLE IRA distributions may be comprised of earnings, additional contributions and/or conversions. IRA owners are encouraged to review the Traditional and/or Roth IRA rules to determine if the distributions are subject to tax and/or penalty.
Earnings – The money earned in the IRA as it grows in value, above and beyond the contributions that are made from year to year.
Individual Retirement Account (IRA) – A specific retirement account established with a qualified financial institution, such as a bank, trust company, broker, custodian or mutual fund, in which contributions may be invested in many types of traditional investments, such as stocks, bonds and money market accounts, or alternative investments, such as real estate, hedge funds and futures.
Qualified Distribution (Roth IRA) – A withdrawal from a Roth IRA that is:
- Made on or after the date the account owner becomes age 59½;
- Made to a beneficiary or to the estate after the account owner dies;
- Made to the account owner should he/she become disabled within the definition of the IRS code; or,
- Used to pay for qualified first-time homebuyer expenses.
However, even if one of the qualification above is met, the distribution is still not qualified if it is made within a five tax-year period following the first day of the year in which there first was a contribution or a conversion to the Roth IRA.
Roth IRA – An IRA authorized by legislation on or after January 1, 1998, in which contributions are not deductible, “qualified’ distributions - or withdrawals - from the account are not taxable, and earnings on the account are taxable only when a withdrawal is not “qualified.”
SEP (Simplified Employee Pension) IRA – A traditional IRA designated to receive contributions under a simplified retirement account established by an employer for the firm’s employees. An employer may contribute up to $30,000, or 15 percent of an employee’s compensation annually to each employee’s SEP IRA.
SIMPLE (Savings Incentive Match Plan for Employees) IRA – A Traditional IRA set up by a small employer for a firm’s employees. In 2001, an employee could contribute up to $6,500 per year to these IRAs. This contribution limit was increased each year until 2005, when it reached $10,000. In 2006, the allowable amount increased by $500 incrementally whenever the cumulative effects of inflation indicate such an increase is warranted. The employer sponsoring the SIMPLE IRA may also make a matching contribution based on a percentage of the employee’s pay. As of 2001, between the employer and the employee, up to $13,000 may be contributed annually to the participant’s account.
Spousal IRA – A Traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has less than the maximum allowable IRA contribution in annual compensation. 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 the spousal and his/her own Traditional or Roth IRA.
Traditional IRA – An individual retirement account that may have tax-deductible and non-deductible contributions, and in which earnings accrue tax-deferred.
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