IRA
An IRA is an Individual Retirement Arrangement as defined in Section 408(a) of the US Tax Code.
IRA plans were first introduced in 1974 as part of the Employee Retirement Income Security Act (ERISA).
Income received by the investments of an IRA is tax-sheltered. This allows investors to compound the gains over time and accumulate a larger amount of savings than if taxes were assessed each year.
Roth IRA
A Roth IRA accepts contributions on which taxes have already been paid. Income from investments with a Roth IRA is not taxed. Qualified distributions from a Roth IRA are tax-free.
Traditional IRA
A Traditional IRA accepts contributions with pre-tax money. Income from investments with a Traditional IRA is not taxed. Qualified distributions from a Traditional IRA are taxed at normal income rates
Inherited IRA
An Inherited IRA is any type of IRA (Traditional, Roth, etc.) that has been inherited from another individual such as a parent, spouse, sibling, etc. An inherited IRA is sometimes referred to as a beneficial IRA.
Beneficial IRA
A Beneficial IRA is any type of IRA (Traditional, Roth, etc.) that has been inherited from another individual such as a parent, spouse, sibling, etc. A beneficial IRA is sometimes referred to as an Inherited IRA.
Self-Directed IRA
A self-directed IRA is any type of IRA that is setup so that the IRA account holder chooses the investments of the plan.
A self-directed IRA can be established with a conventional brokerage firm and limited to investing in publicly traded assets or with a non-traditional custodian that allows investments in alternative assets.
IRA Account Holder
The individual who establishes an IRA for their own retirement savings.
IRA Beneficiary
A person, trust, or other entity designated to inherit an IRA once the original IRA account holder dies.
IRA Contribution
The placement of new funds into an IRA in a given tax year. Contributions must come from earned income. Contributions must be in cash and are limited in amount. Contribution limits are adjusted periodically by the IRS and can be impacted by the IRA account holder’s income and/or participation in a separate employer sponsored retirement plan.
Contribution Limits
The amount of cash that can be contributed to an IRA in a given tax year. Contribution limits are adjusted periodically by the IRS and can be impacted by the IRA account holder’s income and/or participation in a separate employer sponsored retirement plan.
Deduction Limits
The amount of a contribution to an IRA that may be deducted from the IRA account holder’s income for a given tax year. In cases where an IRA account holder or their spouse also has access to an employer sponsored retirement plan such as a 401(k), the full allowable contribution may not be deductible based on income thresholds.
IRA Distribution
When an IRA Account Holder or beneficiary takes cash or assets out of an IRA to themselves.
IRA Transfer
The act of moving funds from one IRA to another IRA with similar tax treatment. All IRA transfers are initiated via a request from the receiving IRA custodian.
Direct Rollover
The act of moving funds from a qualified employer retirement plan like a 401(k), profit sharing plan, 457 plan or TSP to an IRA. With a direct rollover, funds are issued directly to the receiving IRA and there are no taxes or withholdings required.
Indirect Rollover (60-day rule)
An Indirect or 60-Day Rollover occurs when an individual takes a distribution from an existing IRA or qualified employer plan in their own name. If the amount distributed is subsequently deposited to a retirement plan within 60 days, the funds retain their tax-sheltered status and are not treated as a distribution.
Only one indirect rollover may be executed within a 12 month period.
Normal Retirement Age
Age 59 ½ is considered normal retirement age. This is the age at which one can begin taking distributions from an IRA without a penalty for early distribution.
Required Minimum Distributions
IRA account holders with a Traditional IRA must start taking distributions from the IRA beginning in the tax year they reach 72 years of age. Distributions are also required for holders of Inherited IRA plans where the original account holder passed prior to December 31, 2019.
RMDs are not required from Roth IRA plans during the lifetime of the original IRA account holder.
A calculation based on the appropriate life expectancy table for the type of IRA and account holder is performed to determine the amount that must be distributed in a given year.
Failure to take Required Minimum Distributions results in a tax penalty of 50% of the amount that should have been distributed.
Qualified Distribution
A distribution from an IRA that satisfies the requirements necessary to avoid penalties. Rules that determine the qualified status of a distribution vary across different IRA account types.
Early Distribution
A distribution from an IRA taken before the normal retirement age of 59 ½. Early distributions can be subject to a 10% penalty unless certain exemption criteria apply.
Roth Conversion
The act of moving funds from a Traditional IRA to a Roth IRA. At the time of conversion the value converted is subject to taxation at normal income rates. The funds then acquire tax-free Roth status, with certain limitations on distributions of income in the first 5 years from the year of the conversion.
Qualified Charitable Distribution
An IRA account holder over age 72 can have a distribution from their traditional IRA directly issued to a qualified charity. The distribution is deemed a charitable contribution and not considered taxable income. A Qualified Charitable Distribution can be used to satisfy Required Minimum Distribution amounts.
Disqualified Person
A person with whom an IRA may not exchange any direct or indirect benefit. Disqualified persons include; The IRA account holder, their spouse, lineal family, plan fiduciaries, or an entity controlled by such an individual deemed disqualified.
Prohibited Investment
An investment in life insurance or collectibles as defined by IRC Section 408(m)(2). A prohibited investment is treated as if the value invested were distributed to the IRA account holder.
Prohibited Transaction
Any transaction that creates a direct or indirect benefit between an IRA and a disqualified person or is in violation of the Exclusive Benefit rule. When an IRA engages in a prohibited transaction, the entire IRA is deemed to have been distributed at its fair market value as of the first day of the tax year in which the prohibited transaction occurred.
Fiduciary
A person who exercises discretionary authority over the management of an IRA, provides investment advice for a fee, or has discretionary responsibility for plan administration.
Custodian
A bank or other person/entity that administers an IRA account in adherence to IRS rules.
Non-Traditional Custodian
A custodian that provides recordkeeping services necessary to document investments in non-traditional or alternative assets.
Non-Recourse Mortgage
A mortgage where the only security to the lender is the collateral subject to debt. In the event of default, the lender has no means to pursue the borrower for additional compensation.
Unrelated Business Taxable Income
Income generated when a tax-exempt entity such as an IRA engages in a trade or business on a regular or repeated basis. Commonly referred to as UBTI.
Unrelated Debt Financed Income
Income generated with a tax-exempt entity such as an IRA receives income from property acquired with the use of debt-financing. Commonly referred to as UDFI.
Unrelated Business Income Tax
The type of tax paid when a tax-exempt entity such as an IRA generates taxable UBTI or UDFI. Commonly referred to as UBIT.
Checkbook Control IRA
An IRA construct where the IRA account invests in a legal entity such as a trust or LLC. The IRA account holder acts as a non-owner trustee or manager, and can therefore direct the affairs of the entity on behalf of the IRA. This direct control over the entity bank account is referred to as checkbook control.
IRA Investment Trust
A specially designed revocable trust where an IRA is the grantor and beneficiary of the trust and the IRA account holder is the trustee. This construct provides the IRA account holder with checkbook control over IRA funds.
Trustee
A person designated to hold the property of a trust and administer the trust on behalf of trust beneficiaries.
Trustor/Grantor
A person or entity who opens a trust, places assets into the trust, and directs a trustee to manage the affairs of the trust on behalf of trust beneficiaries.
Trust Beneficiary
A person or entity who receives the beneficial interest of assets held within a trust.
Fair Market Valuation
The value at which an asset would sell on the open market. The price would be agreeable to a willing buyer and willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts.
ERISA
The Employee Retirement Income Security Act of 1974 that sets standards for the establishment and operation of retirement and health plans in private industry.
Alternative Asset
Investment assets not typically available on a public exchange. Examples include real estate, private equity, precious metals, mortgage notes, and tax liens.
Accredited Investor
An investor defined in Securities and Exchange Commission regulations and deemed to be financially sophisticated. An accredited investor is allowed to trade certain unregistered securities that do not provide the types of disclosures required for listed securities.
To be an accredited investor as an individual, one must have a net worth excluding primary residence in excess of $1 million – individually or jointly with a spouse. A person is also considered accredited if they have two years of annual income exceeding $200,000 or combined income exceeding $300,000 jointly with their spouse.