August 3, 2016

Glossary of Commonly Used IRA Terms

Shelly Smith
10 min

401(k) Plan: A Defined Contribution Qualified Plan which permits employees to defer income form their pay and contribute that amount to a separate account for their retirement benefit.

Anti-alienation Provision: This provision protects Qualified Plan assets from creditors provided there is at least one common law employee.

Beneficiary: An individual who is designated to receive plan funds/benefits. This individual is designated by the Plan owner.

Beneficiary Designation Form: A form filled out upon opening an IRA or Plan which allows a beneficiary to be designated.

Buy Direction Letter: A letter provided to the Plan Administrator/Custodian which initiates the purchase of assets.

Collectible: Any tangible personal property as specified by the IRS (including antiques, rugs, art, coins, jewelry, etc.) that is disallowed for investment purposes with an IRA or Plan.

Contribution: Funds given to an IRA or Plan. These are limited annually and must be in made accordance with the appropriate rules.

Coverdell Educational Savings Account: An IRA account set up for the purpose of paying the qualified educational costs of the beneficiary.

Custodian: A designated individual or company who handles IRA or Plan assets and transactions. This entity must be approved by the IRS.

Debt Financing: Using a loan to pay for plan assets. This is subject to special rules regarding recourse and guarantees.

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. Contributions are based on actuarial computations of what is needed to provide determinable assets to each plan participant.

Defined Contribution Plan: A Qualified Plan whose benefits are largely based on amount 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 from an IRA or Qualified Plan. These are subject to IRS guidelines.

ERISA: Employee Retirement Income Security Act of 1974, as amended.

Escrow Agent: An agent who assists with the 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 are subject to taxes.

Fair Market Value: The value of an asset. A common formula for obtaining fair market value is determined by a willing buyer and seller with all of the facts about the asset.

Fee Disclosure: A form provided at application for an IRA or Qualified Plan. This lists all appropriate fees associated with the account.

Health Savings Account: A tax-exempt trust account set up for the purpose of paying qualified medical expenses.

Highly Compensated Employee: An employee whose salary is greater than or equal to 10% of the employer’s yearly wages.

In Kind Contribution: An asset contributed to an Individual 401(k) account. The contribution must be at fair market value and stay within contribution limits.

Indirect Rule: An IRS guideline that, paraphrased, states that no transaction that cannot be done directly can be done indirectly.

Individual 401(k) Plan: A Qualified Plan set up for business owners who have no 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 that allows the participant to open an IRA account. The name of the Trustee/Custodian/Administrator is included in the application.

IRA Distribution/Withholding Form: A form that needs to be completed in order 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 who provides financing for a transaction. This may include a bank, mortgage broker, private lender or other party.

Leveraged Transactions: Also known as Debt Financed Transactions, or using borrowed funds for part of a purchase.

Limited Power of Attorney: A form required 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.

Modified AGI: This is used for the purposes of contributing to a Roth IRA. The steps for determining an adjusted contribution using the Modified Adjusted Gross Income can be found in the workbook.

Money Purchase Plan: A Defined Contribution Qualified Plan which has contributions based on an employee’s compensation. Once a contribution level is established, it can not be changed without IRS approval. This plan is not often used as of 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 401(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: A plan approved by the IRS which 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.

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 the acceptable limits as defined by the IRS.

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: A Simplified Employee Pension. 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 handles the administrative tasks of repaying Debt Financing.

SIMPLE IRA: A Savings Incentive Match Plan for Employees. 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 401(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 as per the IRS. These include transactions involving collectibles.

Tax Lien Certificate: This certificate documents the purchase of a tax obligation from a taxing authority. The tax obligation was previously unpaid by the property owner of record and is then sold to a private investor so the taking authority can receive immediate income.

Third Party Administrator: An entity hired to perform functions required on behalf of a Trustee or Custodian.

Title Report: A report issued prior to a real estate settlement which gives a property description and informs the buyer and seller of any liens, lot adjustments, etc. that may affect the property in question.

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.

Vesting: A portion of ownership of assets in a Plan.

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