Understanding Retirement Terms

Understanding Retirement Terms

Understanding Retirement Terms

Understanding retirement terms will help you better navigate the complex world of retirement planning.

Deductible IRA. An individual retirement account that allows the owner to deduct the amount of the contribution from current federal income taxes.

Deferred compensation. Income that is not currently payable to an employee but that is payable in the future.

Defined benefit plan. A qualified retirement plan that defines what the benefit will be at retirement.

Defined contribution plan. A qualified retirement plan that provides an individual account for each participant and specifies the annual contributions that each employee receives (the benefits of each employee are based upon the value of his or her account at retirement).

Distribution. Any outflow from a retirement plan.

Full retirement age. The age at which full Social Security old-age benefits are available.

Indirect rollover. A transfer of cash or other property between qualified plans or IRAs in which the owner takes temporary receipt of the funds. The rollover is tax free and without penalty if completed by the 60th day after the distribution from an IRA or an employer plan.

Individual Retirement Account (IRA). A special custodial or trust account implemented through brokerage firms, banks, insurance companies, mutual funds, and various other financial institutions. In all cases, earnings accumulate within an IRA on a tax-deferred basis. In some cases, the amount of the individual’s contribution to an IRA is deductible from his or her current taxable income.

Lump-sum distribution. A distribution representing the entire amount of a participant’s qualified plan account balance.

Nondeductible IRA. An individual retirement account in which contributions may not be deducted from current taxable income.

Understanding Retirement Terms

Qualified plan. A retirement plan that meets the stringent requirements of section 401(a) of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA). Qualified plans have unique tax advantages for employers and plan participants.

Rollover. A tax-free transfer of cash or other property from one retirement plan to another.

Roth IRA. A nondeductible IRA with several unique features. Certain withdrawals are not taxable if left in the account for five years, the owner may continue to make contributions to the account at any age as long as there is earned income, and there is no required beginning date for withdrawals.

Section 401(k) plan. A plan in which employees may choose to defer compensation on a before-tax basis and have those deferrals invested for retirement purposes. Such plans often include employer matching contributions and employer discretionary profit sharing contributions.

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Understanding Retirement Terms

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