Business Glossary

employee investment plan; also called salary reduction plan. It allows employees to defer part of their gross salary and to invest the amount in stocks, bonds, or money market funds. The amount is indexed for inflation, using the Consumer Price Index (CPI). Employee contributions and all earnings arising from them go tax-free until withdrawn at the request of the employee or until the employee retires or leaves the company. Usually the employer provides a choice of investment vehicles into which the funds may be placed while earning tax-deferred returns. Furthermore, many employers offer matching contributions. The limitation of annual deferrals to 401(k) plans applies only to an employee's elective deferrals-not the employer's matching funds. These contributions, plus the current reduction in income taxes, make 401(k) salary reduction plans an excellent longterm investment.

Individual Retirement Arrangement(IRA) that can be actively managed by the account holder, who designates a custodian to carry out investment instructions. The account is subject to the same conditions and early withdrawal limitations as a regular IRA. Investors who withdraw money from a qualified IRA plan have 60 days in which to roll over the funds to another plan before they become liable for tax penalties. Most corporate and U.S. government securities, stocks, mutual funds, and metals such as gold, silver, platinum, and palladium are eligible to be held by a self-directed IRA.

provision in the U.S. tax code allowing the owner of an Individual Retirement Account to transfer assets of the account, without penalty, into another IRA account or qualified retirement plan if the funds are reinvested within 60 days. The same rule applies to early distributions of pension fund shares, profit sharing plans, and other tax qualified employee savings plans. This provision allows individuals to shift assets from one form of investment to another, without having to pay the 10% IRS penalty on early withdrawals. Also called " rollover IRA."

tax-deferred retirement plan for self-employed individuals meeting certain requirements; also called H.R. 10 plan. Selfemployed individuals can contribute to their Keogh plan up to 25% of earnings, or a maximum of $40,000.

Individual Retirement Arrangements created by the taxpayer relief act of 1997 permitting account holders to allow their capital to accumulate tax free under certain conditions. The Roth IRA is named after Delaware Senator William V. Roth Jr., who championed the idea of expanded IRAs. Individuals can invest up to $4,000 per year, ($5,000 for those age 50 and over). That amount rises to $5,000 ($6,000 for those age 50 and over) in 2008. There are income limitations on who can contribute to a Roth IRA. A married couple filing jointly can make the full contribution if their modified adjustable gross income (MAGI) is less than $150,000. For a MAGI between $150,000 and $160,000, the amount they can contribute is reduced and they cannot contribute to a Roth IRA at all once their MAGI exceeds $160,000. For singles, heads of household, and married couples filing separately, a full contribution can be made if their modified adjustable gross income (MAGI) is less than $95,000. For a MAGI between $95,000 and $110,000, the amount they can contribute is reduced and they cannot contribute to a Roth IRA at all once their MAGI exceeds $110,000.

Assets inside Roth IRAs can be invested in stocks, bonds, mutual funds, bank instruments like CDs and money market accounts, precious metals, and real estate, like regular IRAs.

IRA holders can withdraw the principal and earnings totally tax free after age 59½, as long as the assets have remained in the IRA for at least 5 years after the first contribution. If the account holder dies before withdrawing from a Roth, the proceeds go to beneficiaries tax free. Unlike regular IRAs, participants do not have to take any distributions from a Roth IRA starting at age 70½, nor do they have to take any distributions at all during their lifetimes. They can also continue to contribute after reaching age 70½.

Individuals with modified adjusted gross income of $100,000 or less can roll over existing and deductible IRA balances into a Roth without the usual 10% early distribution penalty, although regular income taxes are due on untaxed earnings in the account. Figuring out whether or not it is advantageous to roll over assets from a regular IRA to a Roth IRA is a complex decision, and may require advice from a financial professional.

Individual Retirement Arrangement that may be opened in the name of a nonworking spouse. The maximum annual IRA contribution for a married couple, only one of whom is employed, is $8,000 in 2006. The husband and wife can each contribute up to $4,000, as long as their combined compensation is at least that much. For those age 50 or older, each can contribute $5,000, or $10,000 for husband and wife combined. Under the Economic Growth And Tax Relief Reconciliation Act Of 2001, the maximum contribution for those under age 50 is scheduled to rise to $5,000 apiece, or a total of $10,000, in 2008. Before 1997, the nonworking spouse could only contribute $250 to his or her IRA. The same rules apply ($4,000 per person rising to $5,000) when both spouses work. Contributions are deductible only if both husband and wife are not actively participating in a qualified retirement plan.