Glossary

The Glossary defines terms for your quick reference while reading through the materials and posts on the 72tNET website. The Glossary is a work in progress so please Contact Us if you have suggestions for corrections or additions.


Term	Wikipedia Definition
401(k)	In the United States, a 401(k) plan is the tax-qualified, defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code.[1] Under the plan, retirement savings contributions are provided (and sometimes proportionately matched) by an employer, deducted from the employee's paycheck before taxation (therefore tax-deferred until withdrawn after retirement or as otherwise permitted by applicable law), and limited to a maximum pre-tax annual contribution of $19,000 (as of 2019).[2][3} Other employer-provided defined-contribution plans include 403(b) plans for nonprofit institutions, 457(b) plans for governmental employers, and 401(a) plans. These plans may provide total annual addition of $55,000 (as of 2018) per plan participant, including both employee and employer contributions.
72t Method	The method you will use in calculating your annual SEPP distribution amount. The IRS allows three (3) options, the amortization method, the annuitization method and the RMD method. Each method performs the calculation differently and arrives at a different annual distribution amount. The amortization method provides the largest distribution amount and is therefore is used most often. For definitions of the three methods, see question #6 in Retirement Plans FAQs under Resources on this website.
Account Balance	The value of assets in an retirement account (Tracy's definition). The IRS requires SEPP plan owners to use "reasonable" account balances, such as 12/31 of the prior year, or even the last day of the month prior to the SEPP start date. See the Q&A section of this website for examples of reasonable choices.
AFR Rate	The schedule of Applicable Federal Rates published by the IRS on a monthly basis and used for federal income tax purposes, including calculating SEPP distribution amounts.
Annual Recalc	Your decision to recalculate your annual distribution amount each year. There are benefits and risks to this decision, so educate yourself before deciding on annual recalculations.
Annuity	An annuity is a series of payments made at equal intervals.[1] Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. Annuities can be classified by the frequency of payment dates. The payments (deposits) may be made weekly, monthly, quarterly, yearly, or at any other regular interval of time. An annuity which provides for payments for the remainder of a person's lifetime is a life annuity.
Beneficiary	A beneficiary (also, in trust law, cestui que use) in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person who receives the payment of the amount of insurance after the death of the insured.
Custodian	A custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not engaged in "traditional" commercial or consumer/retail banking such as mortgage or personal lending.
Distribution	A withdrawal of assets from a retirement account, thereby reducing the value of the assets by the distributed amount. (Tracy's definition)
Distribution Start Date	The date on which you requested your first SEPP distribution. Some custodians take several days to transfer the funds, so this date becomes important, especially towards the end of a calendar year where the funds may be received in the next year. This is a very important date so make sure you keep a copy of your official distribution request with your SEPP documentation.
Dividends	A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.[1] When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business (called retained earnings) and pay a proportion of the profit as a dividend to shareholders.
ETF	An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks.[1][2] An ETF holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value,[3] although deviations can occasionally occur. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.
IRA	An individual retirement account[1] (IRA) is a form of "individual retirement plan",[2] provided by many financial institutions, that provides tax advantages for retirement savings in the United States. An individual retirement account is a type of "individual retirement arrangement"[3] as described in IRS Publication 590, individual retirement arrangements (IRAs).[4] The term IRA, used to describe both individual retirement accounts and the broader category of individual retirement arrangements, encompasses an individual retirement account; a trust or custodial account set up for the exclusive benefit of taxpayers or their beneficiaries; and an individual retirement annuity,[5] by which the taxpayers purchase an annuity contract or an endowment contract from a life insurance company.[6]
IRA Universe	A group of IRAs owned by a single owner which, together, are used as the "account balance" of an individual's SEPP plan. (Tracy's definition)
IRC	The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code (USC).[1] It is organized topically, into subtitles and sections, covering income tax (see Income tax in the United States), payroll taxes, estate taxes, gift taxes, and excise taxes; as well as procedure and administration. Its implementing agency is the Internal Revenue Service.
IRS	The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The IRS is responsible for collecting taxes and administering the Internal Revenue Code, the main body of federal statutory tax law of the United States. The duties of the IRS include providing tax assistance to taxpayers and pursuing and resolving instances of erroneous or fraudulent tax filings.
Life Table	Mortality tables predicting the likelihood of death occurring in a particular year. The IRS allows the use of three (3) tables: the Uniform Life Table, the Joint Life table, or the Single Life Table to be used in calculating annual SEPP distribution amounts.
Penalty, 10%	An additional tax charged by the IRS for retirement plan distributions which violate the exceptions defined in IRC Section 72t. (Tracy's definition)
RMD	Required Minimum Distributions, often referred to as RMDs, are amounts that the US federal government requires one to withdraw annually from traditional IRAs and employer-sponsored retirement plans.
Rollover	An individual retirement account rollover is a transfer of funds from a retirement account into a traditional IRA or a Roth IRA. This can occur through a direct transfer or by a check, which the custodian of the distributing account writes to the account holder who then deposits it into another IRA account. (Investopedia definition)
Roth IRA	A Roth IRA (individual retirement account) plan under United States law is generally not taxed, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.
Self-Directed IRA	A self-directed Individual Retirement Account is an Individual Retirement Account (IRA), provided by some financial institutions in the United States, which allows alternative investments for retirement savings. Some examples of these alternative investments are: real estate, private mortgages, private company stock, oil and gas limited partnerships, precious metals, horses, and intellectual property.
SEPP	Substantially equal periodic payments (SEPP) are one of the exceptions in the United States Internal Revenue Code §72(t)(1) that allows receiving payments without the 10% early distribution penalty from a retirement plan or deferred annuity before the usual 591⁄2 age restriction under certain circumstances. The rules for SEPPs are set out in Code section 72(t) (for retirement plans) and section 72(q) (for annuities).
SEPP Universe	The IRA or IRAs used in the SEPP Plan. A SEPP Plan can consist of a single IRA account or multiple traditional or Roth IRA accounts, even among multiple brokerage firms, as long as all accounts are owned by the same owner. Careful though: the more complex the SEPP Universe, the more likely a mistake will be made and the plan will be busted.
Stock	The stock (also capital stock) of a corporation is all of the shares into which ownership of the corporation is divided.[1] In American English, the shares are commonly known as "stocks".[1] A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt),[2] or voting power, often dividing these up in proportion to the amount of money each stockholder has invested.
Stub Year	A stub year is a year in which a partial distribution from a retirement account is taken during the first year of a SEPP plan. For instance, if John started his SEPP plan on June 30, 2020, then he could choose to take the full year's distribution, or 50% (half of a year) for 2020 ONLY. In all subsequent years John must take 100% of his annual amount, until he reaches the 5 year mark or age 59 1/2.
Traditional IRA	A traditional IRA is an individual retirement arrangement (IRA), established in the United States by the Employee Retirement Income Security Act of 1974 (ERISA). The IRA is held at a custodian institution such as a bank or brokerage, and may be invested in anything that the custodian allows (for instance, a bank may allow certificates of deposit, and a brokerage may allow stocks and mutual funds). Unlike the Roth IRA, the only criterion for being eligible to contribute to a Traditional IRA is sufficient income to make the contribution. However, the best provision of a Traditional IRA — the tax-deductibility of contributions — has strict eligibility requirements based on income, filing status, and availability of other retirement plans (mandated by the Internal Revenue Service). Transactions in the account, including interest, dividends, and capital gains, are not subject to tax while still in the account, but upon withdrawal from the account, withdrawals are subject to federal income tax (see below for details). This is in contrast to a Roth IRA, in which contributions are never tax-deductible, but qualified withdrawals are tax free. The traditional IRA also has more restrictions on withdrawals than a Roth IRA. With both types of IRA, transactions inside the account (including capital gains, dividends, and interest) incur no tax liability.[2]
Transfer	An IRA transfer is the transfer of funds from an individual retirement account (IRA) to another type of retirement account, brokerage account or bank account. An IRA transfer can be made directly to another account. IRA transfers can also involve the liquidation of funds for depositing capital in a new account. IRA transfers can be simple when they are made between common types of accounts. An investor can transfer a Traditional IRA from one service provider to another without any costs. The same is true with a Roth IRA, which also can be transferred easily from one service provider to another as long as the type of account is the same. IRA transfers can become complex when they involve liquidations or conversions. Traditional IRAs will involve the greatest tax implications if converted to a Roth or liquidated. Investors converting a Traditional IRA to a Roth IRA will have to pay the income taxes associated with the Traditional IRA before depositing funds in a Roth IRA. Investors making a liquidation from a Traditional IRA to fund a brokerage account would also have to pay the taxes. In-kind transfers may be accepted from one account to another however tax implications would still apply. (Investopedia definition)
Withdraw	To remove funds from a retirement account. Similar to Distribution. (Tracy's definition)
Withdrawal	Withdrawal means "an act of taking out"