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Glossary of Terms

Adjusted Gross Income - An interim calculation used in computing income tax liability. It is computed by subtracting certain allowable adjustments from gross income.

Age Rule - Rule regarding eligibility to contribute to a Traditional IRA. An individual must be under age 70½ for the entire year to make a regular contribution to an IRA.

Asset Allocation - The process of determining how investment funds will be apportioned among different asset classes, such as stocks, bonds, and cash reserves. Many financial advisers believe that the mix of asset classes has a greater impact on long-term portfolio results than does the performance of any individual investment.

Compounding - Earning money on a principal investment and its interest, usually calculated on a monthly or yearly basis. Compounding is said to be one of the best ways to create wealth.

Coverdell Education Savings Account - A type of account (previously called the Education IRA) created under the Taxpayer Relief Act of 1997, established exclusively for paying qualified education expenses of the designated beneficiary. Contributions are non-deductible and earnings are tax-free for qualified withdrawals.​

Death Distribution - The payment of IRA funds to a beneficiary upon the death of an IRA owner.

Deduction - Expense allowed by the Internal Revenue Service to be subtracted from an individual’s gross income before figuring a person’s taxable income. Certain Traditional IRA contributions are classified as a tax deduction.

Defined Benefit Plan - A qualified plan designed to pay a benefit, typically based on a percentage of salary, at retirement. The employer, not the employee, funds the plan.

Defined Contribution Plan - A qualified retirement plan, such as a 401(k) plan, whose benefits depend on the amount contributed by the employee/employer and the earnings of those contributions.

Direct Rollover - The movement of funds from a qualified retirement plan into an IRA without the account owner taking receipt of the funds.

Distribution - Withdrawing funds from a retirement savings plan.

Diversification - Strategy for reducing the risk of investing in a single industry/market sector or a small number of companies, by spreading the risk over several industries/market sectors or a larger number of companies.

Dollar Cost Averaging - A method of accumulating assets by investing a fixed amount of dollars in securities at set intervals, regardless of stock market movements.

Early (premature) Withdrawal - A withdrawal of funds from an IRA, a 401(k) plan, or any tax qualified retirement plan, usually before age 59½. Early withdrawals are subject to tax penalties, though there are some exceptions.

Earned Income Rule - Rule regarding eligibility to contribute to certain types of IRAs. For a Traditional or Roth IRA, an individual must have earned income to contribute. Earned income includes but is not limited to wages, salaries, bonuses, tips, commissions and taxable alimony.


Education IRA - See Coverdell Education Savings Account.

Employer-sponsored Retirement Plan - A Defined Contribution or Defined Benefit retirement plan. The most common types are 401(k), Profit Sharing Plans and Pension Plans. Other types include SEP, Keogh, and SIMPLE plans.

Excess Contribution - Any IRA contribution that exceeds the maximum contribution limits permitted by law. Penalty taxes apply for each year an excess contribution exists.

FDIC - The Federal Deposit Insurance Corporation is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system by: insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, managing receiverships.

401(k) Plan - A retirement plan that enables employees to set aside a portion of their compensation in a special account, often with matching contributions from the employer. Contributions and earnings grow tax-deferred until withdrawn – ideally at retirement.

Form 5329 - The IRS tax form on which early (premature) withdrawals are reported.

Form 8606 - The IRS tax form on which non-deductible IRA contributions are reported.

Individual Retirement Account (IRA) - A tax-deferred retirement plan that an individual with earned income can open. Some individuals may deduct their IRA contributions from their taxable income.

Inflation Risk - The risk that the purchasing power of your investment will be eroded by inflation. Because more conservative investments generally provide the lowest returns over time, they are generally more exposed to possible inflation risk.

IRA Rollover - The movement of IRA funds from one IRA provider or qualified retirement plan to the account owner, and then to another IRA provider. The account owner has 60 days to complete this transaction before the transaction is considered a taxable distribution of funds.

IRA Transfer - The movement of IRA funds directly from one IRA provider to another without the IRA owner taking receipt of the funds. This transaction is sometimes referred to as a Trustee to Trustee transfer.

Life Expectancy - The average number of years an individual is expected to live based upon his or her current age. Life expectancy tables provided by the IRS are used in calculating Required Minimum Distributions and Substantially Equal Periodic Payments for IRA distributions.

Lump Sum Distribution - Payment to a recipient of all funds accumulated in a 401(k) account or other tax-qualified plan within one taxable year.

Matching Contributions - An employer contribution to an individual’s 401(k) account based on the amount the individual contributes. For example, the employer may match 50 cents for every dollar the individual contributes.

Qualified Retirement Plan - A Defined Benefit or Defined Contribution retirement plan that receives special tax treatment because it meets the requirements of the Internal Revenue Code.

Required Minimum Distribution (RMD) - The minimum dollar amount an IRA owner must withdraw each year beginning when he or she reaches age 70½, as required by the IRS.

Required Beginning Date (RBD) - The deadline by which an IRA owner must take his or her first Required Minimum Distribution. The RBD is April 1 after the year in which the IRA owner turns age 70½.

Rollover - A tax-free movement of funds from one tax-qualified plan to another or to an IRA. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.

Rollover IRA - An IRA established to hold the assets of an eligible distribution from a qualified plan.

Roth IRA - A type of IRA established under the Taxpayer Relief Act of 1997. The Roth IRA is sometimes referred to as the ‘back-ended’ IRA since contributions are not tax-deductible, but the earnings may be withdrawn tax-free if IRS guidelines are met.

Roth IRA Conversion - The distribution of assets from a Traditional IRA into a Roth IRA.

Recharacterization - The reversal of a Roth IRA conversion or the redesignation of funds between plan types.

Self-directed IRA - An IRA that allows the individual to select the investment options that best fit their investment objectives. The investment choices include stocks, bonds, mutual funds and other funds and other investment vehicles, Certificate of Deposits and other savings vehicles.

Simplified Employee Pension Plan (SEP) - An employer-sponsored retirement plan that is designed for owners of small businesses or self-employed individuals. Contributions are tax-deductible and earnings tax-deferred. Qualified individuals can contribute a fixed percentage of their earned net income (up to $49,000 maximum for 2011). SEPs are more flexible, easier to set up, and simpler to administer than many other qualified plans.

Substantially Equal Periodic Payments - A type of distribution from an IRA that may begin, without penalty, prior to age 59½. Substantially equal payments are calculated over the IRA owner’s life expectancy.

Tax-Deferred - The postponement of taxes and sometimes the initial investment, until the funds are distributed.

Traditional IRA - Original IRA designed to encourage individuals to save for retirement. The three benefits of a Traditional IRA are tax deferral of interest/earnings, potential tax deferral of contributions and assurance for a more financially secure retirement.

Vested - For a retirement savings plan participant, vesting refers to the gradual granting of ownership of contributions made by your employer.

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