Self Directed IRA Glossary

403(b) Plan – A tax-favored retirement plan which may be adopted by public schools or tax-exempt employers for its staff. 

Active Participant – A taxpayer who is covered by an employer-maintained qualified retirement plan, or a qualified self-employed retirement plan, if even for only one day during the year.

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 amount of money per year you can contribute to your IRA. Annual contributions to a Roth IRA, for instance, are limited to a maximum annual amount minus the taxpayer's traditional IRA contributions. The amount you may put into an education IRA, however, is in addition to the annual limit applicable to traditional and Roth IRA contributions.

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.

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) 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.

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 Coverdell Education Savings Account is an account created as an incentive to help parents and students save for education expenses.

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.

Distribution - Any withdrawal of cash or assets from an IRA or other retirement plan.

Early Distribution - Distributions taken from a Traditional or Roth IRA before age 59½. 

Earnings – The money earned in your IRA as it happily grows from year to year, as distinct from any contributions that you've made to it.

Education IRA- See the definition for 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.

Fair Market Value- The fair market value is the value of an asset or assets of an IRA as of a certain date.

Indirect Rollover- A rollover to an IRA from another IRA or 401(k) or other permissible retirement plan that is not an direct rollover.  An indirect rollover generally must be completed within 60 days.

Individual Retirement Account (IRA)- A self-directed, tax-deferred retirement investment account established by employed workers who earn a salary, wage, or self-employment income. An IRA account can be with a bank, mutual fund, insurance company, or another trustee. Deposits for traditional IRAs are tax deductible and the investment earnings in the account are not taxable until withdrawn. Different rules apply depending on the type of IRA account.

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.  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) - The amount of income that determines how much of an individual's IRA contribution is deductible. The modified adjusted gross income is found by taking the individual's adjusted gross income and adding back certain items such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.

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 person who, upon the insured's death, has the first right to receive insurance proceeds.

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; or
• Made after the owner's death; or
• Made after the owner becomes disabled within the definition of tax laws; or
• Used to pay for qualified first-time homebuyer expenses.

Qualified Retirement Plan - Plan that meets the qualification requirements set out in detail in Internal Revenue Code sections 401 and 403(a), and as such, are plans established, operated and supported by employers, which have been submitted to and formally approved and "qualified" by the Internal Revenue Service

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.

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.

Simplified Employee Pension IRA (SEP-IRA)- A retirement program for self-employed people or owners of small companies allowing them to defer taxes on investments intended for retirement

SIMPLE IRA or SIMPLE 401(k) - The "Savings Incentive Matching Plan for Employees." SIMPLE IRAs are Individual Retirement Annuities funded with employee elected salary deferrals and matching or nonelective employer contributions. Suited for small businesses with less than 100 employees earning $5,000 or more in the previous calendar year and the same or greater anticipated earnings for the current calendar year.

Solo 401(k) - A retirement investment plan that allows an employee to put a percentage of earned wages into a tax-deferred investment account selected by the employer.

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. 

Spousal IRA Contribution - A contribution to a spousal IRA. 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 growth - Earnings growth which is not income-taxed while in the IRA but taxed when distributed from the IRA. 

Tax-free growth - Earnings growth which is never income-taxed, even when distributed out of the IRA.

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 Tax, or UBIT- UBIT is a very steep and complicated form of taxation. Much like Federal Income Taxes, UBIT is set to a laddered schedule.  However it is compressed on much tighter levels.  UBIT was implemented to keep the playing field even between plans that open businesses and the typical small business owners.  If a plan or self-directed IRA was able to purchase a business and did not have to pay any taxes, it would be able to deliver an identical product at a discount.  UBIT mitigates that risk for the typical business owner.  UBIT is one of the most complicated areas of taxation in the Internal Revenue Code.  It is imperative that you seek professional help to make sure you do not incur any severe tax penalties.

Unrelated Debt-financed Income, or UBTI - 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.