Simple IRA – Key Terms

by Manshu on November 9, 2006

in Articles

IRA or the Individual Retirement Account provides double benefits to the customer. In the first instance it provides Compound Interest and the additional benefit is that there is no tax on this income. This mode of saving is really good if you have the money and can afford to keep it in the account for a longer period. The benefit of compound interest, without the additional burden of tax on this amount, is a powerful incentive to contribute in the Individual Retirement Account or IRA as it is commonly known.

It is better to know some of the terms and what they mean to you as an Individual Retirement Account holder.

1. Annual Contribution Limits.

There are limits to the amount of money that you can contribute annually in any type of IRA. Roth IRA limits the contributions to a maximum yearly amount which excludes the traditional IRA contributions of the taxpayer. However contributions in education IRA can be made in addition to the annual limits that are imposed on the traditional as well as Roth IRA contributors.

2. Adjusted Gross Income or AGI.

It relates to the entire amount you collected or your total income minus the adjustments made towards moving expenses, deductible retirement plan contributions and any other expense which has been paid through this account.

3. Contributions.

The term does not refer to your original contribution to the IRA account. This is also not a reference to the money, usually called the principal amount that you deposit into your account. It is the ‘conversions’ to the Roth IRA that are termed by the IRS as ‘qualified rollover contributions’. These amounts are treated as additional contributions when IRS regulations are applied. The distribution rules for ‘qualified rollover contributions’ however differ from those of regular contributions.

4. Distributions or Withdrawals.

The term refers to the amount taken from your IRA account. Distributions usually consist of additional contributions, earnings or conversions.

5. Education IRA (EIRA) refers to the account created to help fund education. It has since been renamed as Coverdell Education Savings Account.

6. Group IRA or Employer and Employee Association Trust Account. This refers to the IRA account set up by employers, employee associations for members and unions.

7. Individual Retirement Annuity.

This refers to the IRA account set up with the participation of a life insurance company by having a special annuity contract.

8. Inherited IRA

Inherited IRA refers to the deceased IRA holder’s account which in the absence of a spouse, benefits some other individual. Here the contributors are not allowed a tax deduction according to the Internal Revenue Code.

9. Rollover (Conduit) IRA

This refers to the account operated to get distribution from a defined contribution, benefit or retirement plan. These distributions are not bound by any contribution limits.

10. Individual Retirement Account

This refers to an account with a broker, mutual fund or bank where the contributions can be invested in various types of securities such as bonds, stocks and the money market.

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