Business Glossary

pension plan in which both the employee and the employer contribute to an Individual Retirement Arrangement (or Account) (IRA) Under the tax reform act of 1986, employees (except those participating in SEPs of state or local governments) may elect to have employer contributions made to the SEP or paid to the employee in cash as with cash or deferred arrangements (401(k) Plan). Elective contributions, which are excludable from earnings for income tax purposes but includable for employment tax (FICA and FUTA) purposes, are limited to 25% of net wages up to a certain maximum, which was $210,000 in 2005, or $42,000, whichever is less. SEPs are limited to small employers (25 or fewer employees) and at least 50% of employees must participate. Special provisions pertain to self-employed persons, the integration of SEP contributions and Social Security benefits, and limitations on tax deferrals for highly compensated individuals.

form of salary reduction plan that qualifying small employers may offer to their employees.Simple stands for Savings Incentive Match Plans for Employees. Employers with no more than 100 employees earning $5,000 or more in a year who do not offer any other retirement plan can offer Simple IRAs. Self-employed workers also are eligible to establish these accounts.

Workers offered a Simple IRA may contribute up to $10,000 per year into the account. Employees age 50 or older can contribute up to $12,500. Employee contributions are excluded from taxable pay on Form W-2 and are not subject to income tax withholding, although Social Security taxes are paid on those earnings. While the employer may pick the financial institution in which to deposit the simple IRA funds, employees have the right to transfer the funds to another financial institution of their choice without cost or penalty.

Employers must make either a matching contribution or a fixed "non-elective" contribution to their employees' accounts each year. If the employer chooses matching contributions, the employer must match the amount the employee contributes up to 3% of compensation. Or the employer may make a non-elective contribution of 2% of wages for each eligible employee.

Distributions from simple IRAs follow the same rules as regular IRAs, with one exception. If premature distributions are taken before the employee reaches age 59½ and during the first two years after the employee starts participating in the plan, the penalty is 25%, not the usual 10%. After the first two years, the regular 10% penalty applies to pre-age 59½ withdrawals. Withdrawals taken after age 59½ are fully taxable at regular income tax rates, and mandatory withdrawals must begin at age 70½, according to IRS life expectancy tables.

Assets inside simple IRAs can be invested like any other IRAs, in stocks, bonds, mutual funds, bank deposits, annuities, or precious metals.

The simple IRA replaced the Salary Reduction Simplified Employee Pension plan (known as SARSEP) in 1997. SARSEPs may be continued only by employers who established them before 1997.

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.

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.

account created by the Economic Growth And Tax Relief Reconciliation Act Of 2001 to encourage parents to save for their children's education. The ESA, formerly called the Education IRA, was named after Georgia Senator Paul Coverdell who championed the idea. Parents can contribute annually up to $2,000 per child into an account held at a bank, mutual fund, insurance company, or brokerage firm which can be invested in stocks, bonds, mutual funds, CDs, money-market accounts, and other securities. When the money is withdrawn for use for a qualified education expense, it is distributed tax-free. Contributions to the Coverdell are not deductible. Only married couples filing jointly with adjusted gross incomes of $190,000 may contribute the full $2,000 to a Coverdell. The contribution limit is phased down for incomes up to $220,000, after which no contributions are allowed. Singles with adjusted gross incomes up to $95,000 may make the full contribution, and those with incomes up to $110,000 may make limited contributions. Singles with incomes over $110,000 may not make Coverdell contributions.

Contributions can be made up to the due date of the tax return-usually April 15. Funds in the Coverdell account can be used for a wide array of educational expenses including elementary and secondary school tuition and room and board at private, public, or religious schools, tutoring, equipment expenses such as computers, uniforms or books, transportation, and extended daycare programs.