Our IRA Glossary helps you understand some of the commonly used terms in the retirement planning industry.
401(k) Plan – A Defined Contribution Qualified Plan (DCQP) permitting employees to defer income from their pay check and contribute that sum to a separate account to accumulate for their retirement.
Anti-alienation Provision – A provision protecting assets within a Qualified Plan (QP) from creditors as long as there is at least one common law employee.
Beneficiary – A designated individual who will receive plan funds/benefits. The Plan owner will designate this individual.
Beneficiary Designation Form – A form that is completed when opening an IRA or plan to record the designated beneficiary of the plan.
Buy Direction Letter – A letter provided to the Custodian / Plan Administrator to initiate the purchase of assets.
Collectible – Tangible personal property, specified by the IRS, that is disallowed for investment purposes within an IRA or Plan. Property includes antiques, rugs, art, coins, jewelry, etc.
Contribution – Funds paid into an IRA or Plan. There are annual limits and deposits must be in accordance with IRS guidelines.
Coverdell Educational Savings Account – An IRA account set up to pay the beneficiary’s qualified educational costs.
Custodian – A designated individual or company, approved by the IRS, who administrates IRA or Plan assets and transactions.
Debt Financing – Using debt to pay for plan assets. This is allowed subject to special recourse and guarantee rules.
Deemed IRA – The amount of an IRA that is placed into a Qualified Plan.
Defined Benefit Plan – Any Qualified Plan that is not a Defined Contribution Plan. The beneficiary receives set retirement benefits based on salary levels, terms of employment and length of service.
Defined Contribution Plan – A Qualified Plan whose benefits are largely based on the funds contributed or deferred.
Disqualified Person – A person defined by the IRS who is disqualified from performing a transaction within an IRA or Plan. Common Disqualified Persons are spouses, lineal descendants and spouses thereof, fiduciaries and corporations, trusts, etc. owned by the Plan participant.
Distribution – Withdrawals, subject to IRS guidelines, from an IRA or Qualified Plan.
ERISA – Employee Retirement Income Security Act of 1974.
Escrow Agent – An agent who assists with administrative and some financial tasks of a real estate settlement.
Excess Contribution – A contribution made to an IRA or Qualified Plan that exceeds IRS limitations. These contributions are subject to taxes.
Fair Market Value – A description of the value of an asset in the open market.
Fee Disclosure – A form provided at application for an IRA or Qualified Plan. The form lists all appropriate fees associated with the IRA.
Health Savings Account – A tax-exempt trust account set up for the purpose of paying qualified medical expenses.
In Kind Contribution – An asset contributed to an Individual (k) account. The contribution must be at fair market value and stay within contribution limits.
Indirect Rule – An IRS guideline stating that no transaction that cannot be done directly can be done indirectly.
Individual (k) Plan – A Qualified Plan set up for business owners who have zero employees.
Interested Party Designation Form – A form provided at application for an IRA or Plan that allows the plan participant to designate a third party who may receive information about the plan.
IRA or Individual Retirement Account – A personal savings plan with a trustee or custodian that offers tax advantages to set aside money for retirement.
IRA Application – An application form used to open an IRA account.
IRA Distribution/Withholding Form – A form that needs to be completed to take a distribution from an IRA.
IRA Transfer or Direct Rollover Form – A form used to transfer assets from one IRA to another.
Lender – A third party such as a bank, mortgage broker, private lender or other party that provides lending to an IRA.
Leveraged Transactions – Also known as Debt Financed Transactions, or using borrowed funds for part of a purchase.
Limited Power of Attorney – A form required to be completed if a plan participant wishes to allow another party to direct purchases and sales of assets within a plan.
Loan to Value Ratio – The amount of equity in a purchase. This is a large factor for obtaining debt financing when sufficient equity is needed to complete a transaction.
Modified AGI – Modified Adjusted Gross Income. This measure is used to determine how much of a contributor’s gross income is deductible.
Money Purchase Plan – A Defined Contribution Qualified Plan which has contributions based on an employee’s compensation. Once a contribution level is established, it cannot be changed without IRS approval. This plan has been little used since 2003.
Permitted Investments – Investments acceptable to a plan custodian as per IRS Disclosure Form 5305.
Plan Administrator – A party who performs administrative functions for an IRA or Qualified Plan.
Plan Adoption Agreement – An agreement which specifies the terms of an Individual (k).
Plan Participant – The owner of a plan (or the person who open the plan).
Prohibited Transaction – Any improper use of an IRA or Plan by the Plan participant or any disqualified person.
Prohibited Transaction Exemption – A request sent to the DOL to allow for a prohibited transaction in an extreme circumstance.
Qualified Plan – An IRS approved plan that allows for tax-free or tax-deferred funds to be used for the purposes of retirement income. Contributions are made by an employee and an employer as applicable.
Rollover – Moving assets from one IRA plan to another within a 60-day period to qualify for tax free movement of funds.
Roth IRA – A post-tax (but not tax deductible) IRA with tax-free earnings. These may be opened by an eligible party whose income falls into IRS acceptable limits.
Self-Direction – The act of directing how the assets of an IRA or Plan are invested.
Sell Direction Letter – A letter provided to the Plan Administrator / Custodian which initiates the sale of assets.
SEP IRA – A Simplified Employee Pension (SEP) IRA. This Plan allows an employer to make contributions to the employee’s Retirement Plan without becoming involved in more complex arrangements. The contributions are made to a Traditional IRA of each Plan participant.
Servicer – A third party who performs the administrative tasks of repaying Debt Financing
SIMPLE IRA – A Savings Incentive Match Plan for Employees (SIMPLE). This plan is designed for companies with 100 or fewer employees. The plan includes a salary reduction arrangement.
Sole Proprietorship – A business owner who generally has no common law employees. Also, an eligible party for an Individual (k) plan
Spousal IRA – An IRA for the benefit of a non-working spouse. The same contribution limits apply as those of Traditional IRAs even, if the spouse has little or no earned income.
Statutorily Disallowed Investments – Transactions not allowed within an IRA or plan including transactions involving collectibles.
Third Party Administrator – An entity hired to perform functions required on behalf of a Trustee or Custodian.
Traditional IRA – Any IRA that is not a Roth IRA, SIMPLE IRA, Coverdell ESA, etc.
Trustee – The party which has control over the assets of the IRA or Plan.
Unrelated Debt Financed Income Tax (UDFI) – A tax imposed by the IRS which applies to any profit made on a debt financed transaction in excess of $1,000.
Source: MountainWest IRA