Glossary of Terms
Traditional IRA is an individual retirement account (IRA) that allows individuals to direct pretax income, up to specific annual limits, toward investments that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Traditional IRA. Contributions to the Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status and other factors.
Required Minimum Distribution (RMD) is the amount that Traditional, SEP and SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70½. RMD amounts must then be distributed each subsequent year.
Roth IRA is an individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least 5 years and the individual is at least 59½, or if any of the IRS exceptions apply. Similar to other retirement plan accounts, non-qualified distributions from a Roth IRA may be subject to a penalty upon withdrawal.
Simplified Employee Pension (SEP) IRA is a retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee's SEP IRA on a discretionary basis.
SAR-SEP Plan A SAR-SEP is a salary reduction SEP that had to be established before January 1, 1997. Employees may contribute the same amounts as with a 401(k). There are no matching contributions. Half of all eligible employees must participate. No more than 25 employees may be eligible.
SIMPLE IRA is a retirement plan that can be used by most small businesses with 100 or fewer employees. SIMPLE stands for "Savings Investment Match Plan for Employees"; IRA stands for "individual retirement account." Employers can choose to make a mandatory 2% retirement account contribution to all employees or an optional matching contribution of up to 3%. Employees can contribute a maximum of $12,000 annually in 2013; the maximum is increased periodically to account for inflation.
401(k) Plan is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.
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