Terms to Help Taxpayers Better Understand Retirement Arrangements
Contribution: The money that someone puts into their retirement account.
Distribution: The amount that someone withdraws from their retirement account.
Required distribution: A person generally must start taking withdrawals from their retirement account when they reach age 70 and a half.
Traditional: An IRA or 401(k) where contributions may be tax-deductible, but the funds in a traditional retirement account are taxed when they are withdrawn.
Roth: An IRA or 401(k) where the funds are not taxed when they are withdrawn, but contributions are not tax-deductible.
Savings Incentive Match Plan for Employees. This is commonly known as a SIMPLE IRA. Employees and employers may contribute to traditional IRAs set up for employees. It may work well as a start-up retirement savings plan for small employers.
Simplified Employee Pension. This is known as a SEP-IRA. An employer can make contributions toward their own retirement and their employees' retirement. The employee owns and controls a SEP.
Rollover: This is when the retirement account owner receives a payment from their retirement plan and deposits it into a different retirement account within 60 days.