Glossary of Terms

Retirement Paradise
This glossary of terms is listed in alphabetical order for your convenience.

Active Participant

An individual who, in a particular year, benefited under a qualified pension, profit sharing or stock bonus plan; a 403(b) plan; a SEP IRA; a 401(k); a qualified annuity; any plan described in IRC Sec 501(c)(18); or a plan established for its employees by the U.S., by a state or political subdivision or by an agency or instrumentality of the U.S. or a state or political subdivision (other than a plan under IRC Sec 457(b)).

Adjusted Gross Income (AGI)

All income received over the course of a year (wages, interest, dividends, capital gains, etc), after certain adjustments, including business expenses, alimony, moving expense, as specified on IRS Form 1040.

Annual Contribution Limits

The dollar amount that may be contributed (other than through a rollover or conversion) to an IRA for a year.

Asset Based Loan

A loan where the property qualifies for the loan and the Real Estate Investor demonstrates his/her experience and abilities to reach his/her exit strategy. The interest rate is typically higher and the loan term is typically six to twelve months. The loan term is short because the exit strategy is to refinance to a lower interest rate or the asset is to be sold. Either exit strategy will pay off the hard money loan.

Business Funding Pension Plan

A type of Self-Directed IRA plan that combines a custom designed pension plan and a C Corporation allowing the owner to actively participate in a business and draw a salary.

Carry-back Contribution

A contribution made to a Roth or Traditional IRA between January 1 and April 15 for the prior tax year.

Catch Up Contribution

An additional contribution available for individuals age 50 and older.

Checkbook IRA

A type of IRA also referred to as a Self-Directed IRA LLC, a Real Estate IRA or a Solo401(k). In every instance of the terms being used, a bank account is established for the legal structure. Hence, the use of the term “Checkbook IRA.”


Combining funds from different sources one account or investment, for example, combing amounts rolled over from a qualified retirement plan and other IRA contributions in the same IRA.


Amounts received for personal services, including base salary, commissions, bonuses, overtime and vacation pay. For self-employed individuals, compensation is net earnings from self-employment. For purposes of determining the annual contribution limits for an IRA, alimony and separate maintenance payments are treated as compensation.

Conduit IRA

An IRA that holds only amounts rolled over from a qualified retirement plan, 403(b) plan or similar plan, and earnings on those amounts.

Contingent Beneficiary

The individual(s) and or entity(ies) (e.g., trust, charity, estate) who will receive the proceeds of a retirement account upon the account owner’s death if all Primary Beneficiaries are then deceased.


An amount contributed to an IRA for a particular tax year. Contributions (other than rollover contributions) must be made in cash or check and are subject to annual contribution limits, depending on, among other things, the year and type of account.

Contributory IRA

An IRA that has been funded by cash contributions by the IRA owner, as opposed to funds rolled over from a retirement plan or other IRA.


The change of a traditional IRA, SEP, or other IRA funded with pre-tax funds (or a portion of any such IRA) to a Roth IRA. A conversion is a taxable event.

Coverdell Educational Savings Account

A tax-favored account (formerly called an Education IRA) that is a trust or custodial account established in the United States funded with post-tax contributions to pay for the qualified education expenses of a designated beneficiary. Earnings and withdrawals from a Coverdell account are tax-free if used for those educational purposes. At the time of contributions, the designated beneficiary must be under age 18 or a special needs beneficiary.


Banks and other institutions approved by the IRS to hold retirement funds. And, like all other banking type institutions, they are compensated through an asset and transaction fee structure. By law, every qualified retirement plan must have a custodian or trustee approved by the IRS in accordance with the requirements of IRC section 408.


An individual’s contributions to a traditional IRA are tax deductible if he or she is not an active participant in an employer’s retirement plan. An active participant still may deduct contributions to a traditional IRA depending upon income and filing status. Contributions to a Roth IRA are not deductible.

Direct Rollover

A direct transfer of funds from a 401(k) or other permissible retirement plan to an IRA. A direct rollover avoids the 20% mandatory income tax withholding that would otherwise apply if the funds were first paid to the employee.

Disclosure Statement

A written statement that explains in plain language the rules that govern an IRA. An IRA custodian must provide a current disclosure statement to anyone who opens an IRA.

Disqualified Person

As it relates to IRC, the following would constitute disqualified individuals with regard to entering into any investment or arrangement, directly or indirectly:

  • The IRA holder and his or her spouse;
  • The IRA holders ancestors, lineal descendants and their spouses;
  • Investment advisors and managers;
  • Any corporation, partnership, trust or estate in which the IRA holder has a 50% or greater interest;
  • Anyone providing services to the IRA such as a trustee or custodian



Any withdrawal of cash or assets from an IRA account or retirement plan.

Early Distribution

Distributions taken from a Traditional or Roth IRA before age 59½. Early distributions (also called pre-mature distributions) are subject to a 10% early distribution penalty unless an exception applies.


Money earned yearly through IRA investments.

Education IRA

See Coverdell Education Savings Account.

Employer and Employee Association Trust Account, or Group IRA

An IRA established by an employer, union, and other employee association for its employees or members.

Excess Contribution

The amount of an IRA contribution that exceeds the annual contribution limit for the year.

Fair Market Value

The fair market value is the value (generally, what a willing buyer would pay to a willing seller) of an asset or assets of an IRA as of a certain date. The December 31 fair market value of total IRA assets must be provided to each IRA holder and the IRS each year.

Hard Money Loan

A short-term, asset based loan, typically at higher interest rates.

Indirect Rollover

A rollover to an IRA from another IRA or 401(k) or other permissible retirement plan that is not an direct rollover, i.e., distributed amounts are first paid to the individual recipient. An indirect rollover generally must be completed within 60 days.

Individual Retirement Arrangement (IRA)

Often referred to as an Individual Retirement Account, it is a tax-favored account which an individual can establish which complies with applicable tax rules. Earnings grow tax-free and the funds may be invested into a wide range of assets ranging from public stocks and mutual funds to real estate and private placements.

Individual Retirement Annuity

An IRA established with a life insurance company through the purchase of a special annuity contract.

Inherited IRA

An IRA acquired by the non-spousal beneficiary of a deceased IRA owner. Special rules apply to an inherited IRA. New contributions are not allowed to this IRA, and rollovers to another IRA are not permitted (although direct transfers to another IRA are allowed). Inherited IRA amounts must be distributed within a period specified by the tax laws.

Internal Rate of Return (IRR)

The internal rate of return on an investment or project is the “annualized effective compounded return rate” or “rate of return” that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.

In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment.

Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a project’s internal rate of return, the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front investment, the project with the highest IRR would be considered the best and undertaken first.

Life Expectancy

The number of years an individual is expected to live based on his or her current age and applicable IRS tables.

Net Income Attributable

The amount of income treated as earned by an excess contribution to an IRA.

Non-Recourse IRA Mortgage

The only type of loan allowed for a Self-Directed IRA. According to IRC rules, the holder of the account, the IRA or any business entity funded by the IRA cannot be held liable for the loan repayment.

Primary Beneficiary

The individual(s) and or entity(ies) (e.g., trust, charity, estate) who will receive the proceeds of a retirement account upon the account owner’s death. See also Contingent Beneficiary.


A court process to transfer a decedent’s property to his or her heirs or other beneficiaries.

Profit Sharing Plan

A qualified retirement plan to which an employer may, in its discretion, make contributions on behalf of eligible employees.

Prohibited Transaction

An improper transaction or event involving an IRA or its assets that will result in excise (penalty) taxes or possible loss of the IRA’s tax-favored status.

According to IRC 4975(c)(1), prohibited transactions include any DIRECT or INDIRECT:

  • Selling, exchanging, or leasing, any property between a plan and a disqualified person;
  • Lending money or other extension of credit between a plan and a disqualified person;
  • Furnishing goods, services, or facilities between a plan and a disqualified person;
  • Transferring or using, by or for, the benefit of a disqualified person, the income or assets of a plan;
  • Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account;
  • Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

Qualified distribution (Roth IRA)

A withdrawal from a Roth IRA that is made at least five years after the owner’s first Roth IRA was established AND
Made on or after the date its owner becomes age 59½
Made after the owner’s death
Made after the owner becomes disabled within the definition of tax laws
Used to pay for qualified first-time homebuyer expenses

Qualified Retirement Plan

A plan that meets the requirements of IRC section 401(a) and the Employee Retirement Income Security Act (ERISA) of 1974, thus making it eligible for favorable tax treatment. Contributions and earnings enjoy tax deferred investment growth. Distributed benefits may generally be rolled over to an IRA for additional tax-deferred growth and self-directed investment choices.

Real Estate IRA

Also called a Checkbook IRA, Self-Directed IRA or IRA LLC, generally known as a Real Estate IRA when used to purchase income-producing real estate to hold within a retirement investment portfolio.


An election to treat a contribution made from a Roth IRA as having been made to a traditional IRA or vice versa. Recharacterizations are not taxable but are reported to the IRS.


A conversion of an amount from a traditional IRA to a Roth IRA, after that amount had previously been so converted but later recharactrerized.

Required Beginning Date

The date an IRA owner must begin taking distributions from his or IRA (other than a Roth IRA). The required beginning date is generally April 1 following the year the IRA owner reaches age 70½. There is no required beginning date for a Roth IRA.

Required Minimum Distribution (RMD)

The minimum amount which must be distributed in any year upon attainment of required beginning date or after the IRA owner’s death. The IRS has established a simplified table to determine the required distribution based on the applicable age and life expectancy. If required payments are not timely made, the IRS may impose an excise (penalty) tax. A Roth IRA is not subject to required minimum distributions until after the Roth IRA owner dies.

Return on Investment (ROI)

The amount of profit, before tax and after depreciation, from an investment made, usually expressed as a percentage of the original total cost invested.


The tax-free transfer or deposit of amounts distributed from a tax-favored retirement plan or IRA to a tax-deferred retirement plan or IRA. A “rollover” maintains the tax-deferred status of the account.

Roth IRA

A type of IRA funded with nondeductible contributions or amounts converted (and taxed) from another type of IRA. Qualified distributions from a Roth IRA are free from income tax. Contributions or conversions to a Roth IRA may be made only in years in which the individual’s modified adjusted gross income is within specified limits.

Self-Directed IRA

A Self-Directed Individual Retirement Arrangement is an IRA that requires the account owner to make investment decisions and investments on behalf of the retirement plan. IRS regulations require that either a qualified trustee, or custodian hold the IRA assets on behalf of the IRA owner. Generally the trustee/custodian will maintain the assets and all transaction and other records pertaining to them, file required IRS reports, issue client statements, assist in helping clients understand the rules and regulations pertaining to certain prohibited transactions, and perform other administrative duties on behalf of the Self-directed IRA owner for the life of the IRA account. The custodian usually offers a selection of standard asset types that the account owner can select to invest in, such as stocks, bonds, and mutual funds. In addition, most custodians will also permit the account owner to make other types of investments. The range of permissible investments is broad, however, the IRS does place limits on the types of assets that may be invested in and on the types of transactions that may be carried out.

Signature Guarantee

A stamp or seal provided by a bank or member of a domestic stock exchange that guarantees the authenticity of a signature. A notary public cannot provide a signature guarantee.

Simplified Employee Pension IRA (SEP-IRA)

A type of IRA established by an employer which functions much like a qualified retirement plan, but is subject to fewer rules and administrative requirements.

Solo 401(k)

A 401(k) plan combined with a profit-sharing plan, usually adopted by a sole proprietor or other business with no non-owner employees. Because 401(k) contributions do not count toward the limit on plan contributions which can be deducted, 25% of compensation, a solo 401(k) plan enables some self-employed individuals to contribute and deduct more than with the 25% limit, which applies under a regular profit-sharing plan or SEP-IRA.

Spousal IRA

A traditional or Roth IRA funded by a married taxpayer in the name of his or her spouse who has insufficient compensation to fund the maximum allowable annual IRA contribution. The couple must file a joint tax return for the year of the contribution. The working spouse may contribute up to the maximum annual limits to both the spousal and his/her own traditional or Roth IRAs, provided certain conditions are met.

Tax and penalty-free withdrawals

A withdrawal (or distribution) from an IRA that is not subject to income taxes or penalties. A distribution from an IRA that is rolled over back to an IRA within 60 days is an example (although this is permissible only once every 12 months per IRA). A distribution from a Roth IRA that meets certain conditions is another example.

Tax-deferred investment growth

Earnings growth which is not income-taxed while in the IRA but taxed when distributed from the IRA. For example, if an IRA buys an asset and later sells it for a gain, the gain is not then taxed, as it generally would be if owned outside the IRA. All the proceeds can then be re-invested, and income taxes are paid when amounts are distributed.

Tax-free investment growth

Earnings growth which is never income-taxed, even when distributed out of the IRA. Tax-free investment growth is possible within a Roth IRA, provided certain conditions are met.

Traditional IRA

An Individual Retirement Arrangement (IRA) which is not a ROTH, SEP or SIMPLE IRA.


The movement of a retirement account assets from one custodian directly to another. An asset transfer is not a distribution and is not taxable or reportable to the IRS. There are no limits as to the number or frequency of IRA transfers.

Unrelated Business Taxable Income (UBTI)

Income taxable to an IRA (or other tax-exempt entity) because it is “unrelated” to the IRA’s tax-exempt purpose. Typical examples are income from a manufacturing, sale or service business operated by an IRA or a partnership or LLC in which an IRA is a member, as well as unrelated debt-financed-income. The tax on this income is called unrelated business income tax, or UBIT.

Unrelated Debt-financed Income

Income taxable to an IRA (or other tax-exempt entity) which is attributable to borrowing, either by the IRA directly or a partnership or LLC of which it is a member. Typical examples are income from real estate purchased with borrowing and securities bought on margin. Unrelated debt-financed income is a type of unrelated business taxable income.


see Distribution

1099 Tax Form

A form filed with the IRS which reports, among other things, capital gains and/or dividends from its issuer. Form 1099-R is one type of Form 1099 and reports distributions (whether rolled over or not) form IRAs and certain types of plans.

5498 Tax Form

A form filed annually with the IRS which reports the amount of IRA contributions and the fair market value of the IRA.

401(k) Plan

A tax-qualified retirement plan which allows employees to contribute a before-tax portion of their salary. In general, one of three events can make 401(k) plan benefits eligible for rollover to an IRA: 1) termination of employment; 2) termination of the 401(k) plan (without a “successor” plan) 3) the employee’s attainment of age 59½. The plan document or plan administrator should be consulted to determine if it permits a rollover in a particular case.

403(b) Plan

A tax-favored retirement plan which may be adopted by public schools or tax-exempt employers for its employees. This type of plan, which is also called a tax-sheltered annuity or tax-deferred annuity, works much like 401(k) and other tax-qualified plans, and is generally subject to the same distribution and rollover rules applicable to 401(k) plans (see above). The plan document or plan administrator should be consulted to determine if it permits a rollover in a particular case.