INDIVIDUAL RETIREMENT ACCOUNTS
Here are some common terms used with individual retirement accounts.
Individual retirement account (IRA): A retirement plan set
up by an individual. Contributions and interest in traditional IRAs are not
taxable until the individual makes withdrawals from them. Contributions can
be tax-deductible, depending on one's income status and participation in an
employer-provided retirement plan. There is a limit to how much one may contribute
The Roth IRA is a variation on the IRA. One may not deduct contributions
to it on one's tax return; however, qualified distributions one receives from
it are tax-free.
IRAs can be funded with different types of investments. The investments
may include stocks, bonds, mutual funds, CDs, savings accounts and even certain
precious metal coins issued by the United States. An IRA may not contain collectibles
or life insurance.
IRA rollover: A lump-sum distribution that is reinvested
in another IRA within 60 days to avoid tax and penalties. Only one rollover
is allowed in any one-year period.
Nondeductible IRA: An individual retirement account
whose contributions are not tax-deductible for the investor. Income status and
participation in an employer-provided retirement plan may make an IRA non-deductible.
SEP-IRA: An individual retirement account in the
form of a simplified employee pension. Employers (and, in some plans, employees)
can make tax-free contributions.
Spousal IRA: An individual retirement account funded
by one's spouse. In order to be valid, a spousal IRA may not be co-owned with
the other partner.
Transfer: A movement of money between funds. Trustee-to-trustee
transfers and direct rollovers allow you to change plan custodians without incurring
taxes or early distribution penalties. This is used when you want to move from
one bank, insurance company, or mutual fund to another. There is no IRS restriction
on the number of transfers you can make in a given year.
In the next section, you will find simple terms for the
payments received from retirement plans.