Ch5 textbook

ABLE accounts

Achieving a Better Life Experience accounts, focused on providing benefits to a disabled person.

Amortization Method

A method used to calculate substantially equal periodic payments over the life expectancy.

Annuity Method

A method for calculating payments where account balance is divided by an annuity factor using a reasonable interest rate.

Backdoor Roth IRA

A strategy where taxpayers contribute to a nondeductible IRA and then convert it to a Roth IRA.

Conduit IRA

An IRA established and funded solely with money coming from an employer retirement account.

Early Withdrawal Penalty (EWP)

A 10% penalty applied to premature distributions from retirement accounts.

First-Time Homebuyer Rule

A guideline allowing up to $10,000 to be withdrawn from an IRA for first-time home purchase without penalty.

Inherited IRA

A specially titled account used by beneficiaries to defer taxation on inherited IRA funds.

Nondeductible IRA

An IRA in which contributions do not reduce the owner's taxable income.

Qualified Charitable Distribution (QCD)

Direct distributions from IRAs to eligible charities that are not included in income.

Rollover IRA

An IRA receiving funds from a qualified plan, allowing tax-free distributions as long as reinvested correctly.

Spousal IRA

An IRA contribution made for a spouse who has no earned income.

Traditional IRA

A tax-advantaged retirement account where contributions may be tax-deductible.

Taxable Year 2026 Contribution Limit

The maximum contribution to an IRA in 2026 is $7,500, with an additional $1,100 for those aged 50 and older.

Taxpayer's Adjusted Gross Income (AGI)

A measure of income that is calculated from gross income and used to determine eligibility for IRAs.

Transfer Incident to Divorce

Tax-free transfer of IRA interest between spouses in a divorce.

Tax Treatment of Roth Conversions

Converted amounts from traditional IRAs to Roth IRAs are subject to income taxation at conversion.