Individual Retirement Account Terms

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Individual Retirement Account Terms

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 each year.
• Roth IRA. This 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.
• Roth IRA Conversion. Similar to an IRA rollover or transfer, in which a traditional IRA is reinvested into a Roth IRA. Conversions have ordinary income tax consequences in the year made and are subject to strict IRS rules.
• 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 financial institution, insurance company, or mutual fund to another. There is no IRS restriction on the number of transfers you can make in a given year.