Just like any profession, the world of finance has its own special vocabulary. Those not familiar with the terms may find paperwork confusing or difficult to understand. If you’re setting up a self-directed IRA for the first time, you will want to familiarize yourself with the below terms as you will be seeing them a lot around here!
Administrator The person or company who performs all actions related to running the plan. It could be an employer, a third-party hired to oversee the plan, or a corporate executive.
AGI (Adjusted Gross Income) The total sum of income you took in over the year minus the deductions and other qualified adjustments that reduce the total amount. Income can include earnings from a job, self-employment, taxable interest and dividends, capital gains, rental income, and any other income not exempted from income tax. The deductions for determining AGI may include student loan interest and tuition payments, IRA contributions, and teacher expenses for the classroom. The Tax Bill has changed many deductions for the 2018 year, so it’s best to brush up on what you will qualify for this tax filing year and what may be disappearing for next year.
Beneficiary Someone who receives an inherited IRA designated by the plan owner. They can include spouses, children, or anyone else related or unrelated to the plan owner, as long as they were properly listed on the paperwork.
Contribution Funds given to the IRA or 401(k). There are annual contribution limits for both IRAs and 401(k)s.
Custodian Person who handles all of the fund transfers and/or transactions associated with the plan. They must be an approved member by the IRS.
Disqualified Person Certain transactions cannot be performed within an IRA to benefit a disqualified person. An example would be purchasing a relative’s home with your IRA funds. Disqualified people may include a spouse, parents, children, fiduciaries, corporations, and more.
Distribution Withdrawals made from the IRA. There are regulations determining when you are allowed to make penalty free distributions, and some IRA plans require minimum distributions once you reach a certain age, called RMDs.
Earnings The total amount of money in your IRA minus the contributions. It’s what the IRA has earned, or how much it’s grown by, over a given period of time.
Fiduciary A person in authority over the management or administration of your IRA, or one who provides professional advice as it relates to your IRA.
Inherited IRA An IRA given to a beneficiary of the account after the account holder has passed away. Inherited IRAs have different rules and regulations than Traditional and Roth IRAs.
In-Kind Contribution These contributions are in the form of assets that have been valued at a fair market price. The value must stay within the contribution limits for the account.
Leveraged Transactions Where the account holder uses borrowed funds for purchases with the IRA. Also known as Debt Financed Transactions.
Permitted Investments Any general investments allowed under your plan. Not all plans allow the same investments, such as Real Estate Investments.
Prohibited Transaction These include unacceptable investments per the plan guidelines, or transactions that benefit a disqualified person.
Qualified Plan Approved by the IRS to allow tax-free or tax-deferred funds for retirement income. These are typical IRA plans.
Rollover Transferring funds from one plan to another, such as from a Traditional IRA to a Roth IRA.
Spousal IRA The IRA of a spouse who generates no income, or who generates an income too low to meet the contribution limits for their IRA. The working spouse can contribute to the Spousal IRA as well as their own, effectively doubling annual retirement investments.
Trustee The person who controls the assets in the IRA.
Unrelated Business Taxable Income (UBTI) Income earned by a tax-exempt organization outside of the exempt business-related activities, minus any qualifying deductions.
Unrelated Debt Financed Income Tax (UDFI) The tax on funds gained from a debt financed transaction that exceed $1,000. For example, if you borrowed $4,000 for an investment, and the investment appreciated to $7,000, you would pay tax on the $3,000 it earned.