Tax-Free Retirement Glossary
Definitions for every term you'll encounter when planning a tax-free retirement - from IUL and 7702 plans to RMDs, cap rates, and Roth conversions.
Estate Planning
Estate Tax
A tax levied on the total value of a deceased person's estate before assets are transferred to heirs, imposed at both th...
Learn more ->Inheritance Tax
A state-level tax paid by the beneficiary (heir) based on the value of assets received from a deceased person, with rate...
Learn more ->Irrevocable Life Insurance Trust (ILIT)
A type of trust that owns a life insurance policy, removing the policy's death benefit from the insured's taxable estate...
Learn more ->Beneficiary
A person or entity designated to receive assets or benefits from a life insurance policy, retirement account, or trust u...
Learn more ->Step-Up in Basis
The adjustment of an inherited asset's cost basis to its fair market value at the date of the owner's death, potentially...
Learn more ->Government Programs
IRMAA
Income-Related Monthly Adjustment Amount - a surcharge on Medicare Part B and Part D premiums for higher-income benefici...
Learn more ->Social Security Taxation
The federal income tax applied to Social Security benefits when a recipient's combined income exceeds certain thresholds...
Learn more ->Social Security
A federal government program providing retirement, disability, and survivor benefits funded by payroll taxes, with benef...
Learn more ->Medicare
The federal health insurance program for Americans age 65 and older, with Part A covering hospital care, Part B covering...
Learn more ->Insurance Products
Indexed Universal Life (IUL)
A type of permanent life insurance that earns interest based on the performance of a market index, such as the S&P 500, ...
Learn more ->Cap Rate
In an IUL policy, the maximum rate of interest credited to the policy's cash value in a given period, regardless of how ...
Learn more ->Floor Rate
In an IUL policy, the minimum interest rate credited to the cash value, typically 0%, which ensures the policy never los...
Learn more ->Participation Rate
In an IUL policy, the percentage of the index gain that is used to calculate the interest credited to the policy's cash ...
Learn more ->Surrender Charge
A fee charged by an insurance company when a policyholder withdraws funds or cancels an IUL or other permanent life insu...
Learn more ->Cost of Insurance (COI)
The monthly charge deducted from an IUL or universal life insurance policy's cash value to cover the pure insurance prot...
Learn more ->Cash Value
The savings component of a permanent life insurance policy that accumulates over time and can be accessed by the policyh...
Learn more ->Death Benefit
The amount paid to the named beneficiaries of a life insurance policy when the insured person dies, generally income tax...
Learn more ->Modified Endowment Contract (MEC)
A life insurance policy that has been funded with more premium than allowed by IRS rules (the 7-pay test), resulting in ...
Learn more ->Policy Loan
A loan taken by a life insurance policyholder against the cash value of their policy, which is not considered income and...
Learn more ->7-Pay Test
An IRS test that limits how much premium can be paid into a life insurance policy in its first 7 years; exceeding this l...
Learn more ->Annuity
A financial product sold by insurance companies that provides a series of payments over time, typically used to provide ...
Learn more ->Fixed Index Annuity (FIA)
An annuity product that credits interest based on the performance of a market index, with a floor protecting against los...
Learn more ->Indexed Annuity
An annuity contract that credits interest based on the performance of an external market index, offering potential for h...
Learn more ->Life Insurance Retirement Plan (LIRP)
A permanent life insurance policy structured primarily for retirement income accumulation, designed to maximize cash val...
Learn more ->Whole Life Insurance
A type of permanent life insurance that provides coverage for the insured's entire lifetime with fixed premiums, guarant...
Learn more ->Universal Life Insurance
A type of flexible permanent life insurance that allows adjustable premium payments and death benefits within certain li...
Learn more ->Accumulation Value
The total cash value or savings component in a life insurance policy before surrender charges are subtracted, representi...
Learn more ->Qualified Longevity Annuity Contract (QLAC)
A deferred income annuity purchased inside a retirement account that begins paying income at an advanced age (up to 85),...
Learn more ->Indexed Strategy
In an IUL policy, the allocation option that links interest crediting to the performance of a market index such as the S...
Learn more ->Overfunding
In an IUL or other permanent life insurance policy, funding the policy with the maximum allowed premium while maintainin...
Learn more ->Retirement Accounts
Roth IRA
An individual retirement account funded with after-tax dollars, where qualified withdrawals in retirement, including inv...
Learn more ->Five-Year Rule
The IRS requirement that a Roth IRA must have been open for at least 5 tax years before earnings can be withdrawn tax-fr...
Learn more ->Required Minimum Distribution (RMD)
The minimum amount the IRS requires holders of traditional IRAs, 401(k)s, and most other retirement accounts to withdraw...
Learn more ->Traditional IRA
An individual retirement account funded with pre-tax or after-tax dollars where investment growth is tax-deferred and di...
Learn more ->401(k)
An employer-sponsored defined contribution retirement plan that allows employees to contribute pre-tax income, reducing ...
Learn more ->403(b)
A tax-advantaged retirement plan similar to a 401(k) but available to employees of public schools, non-profit organizati...
Learn more ->Health Savings Account (HSA)
A tax-advantaged savings account available to individuals enrolled in a high-deductible health plan (HDHP), offering a t...
Learn more ->Pension (Defined Benefit Plan)
A retirement plan where an employer guarantees a specific monthly benefit in retirement based on salary history and year...
Learn more ->Stretch IRA
A strategy that formerly allowed non-spouse beneficiaries to take inherited IRA distributions over their lifetime; mostl...
Learn more ->Qualified Retirement Plan
A retirement plan that meets requirements of the Internal Revenue Code and ERISA, entitling employers and employees to t...
Learn more ->SEP-IRA
A Simplified Employee Pension IRA allowing self-employed individuals and small business owners to contribute up to 25% o...
Learn more ->Solo 401(k)
A 401(k) plan designed for self-employed individuals with no employees (other than a spouse), allowing both employee and...
Learn more ->Roth 401(k)
A Roth designation within a 401(k) plan that allows after-tax contributions with the same annual limits as a traditional...
Learn more ->Income Replacement Ratio
The percentage of pre-retirement income that a retiree needs to maintain their standard of living in retirement, typical...
Learn more ->SECURE Act
The Setting Every Community Up for Retirement Enhancement Act of 2019 and its follow-up SECURE 2.0 Act of 2022, which ma...
Learn more ->Catch-Up Contribution
An additional retirement account contribution allowed for individuals age 50 and older, above the standard annual contri...
Learn more ->Qualified Longevity
The risk of outliving one's retirement assets, requiring income sources that will continue for an unknown lifespan that ...
Learn more ->Tax Strategy
Roth Conversion
The process of moving funds from a traditional IRA, 401(k), or other pre-tax retirement account into a Roth IRA, trigger...
Learn more ->Backdoor Roth IRA
A strategy that allows high earners who exceed Roth IRA income limits to contribute to a Roth IRA by making a non-deduct...
Learn more ->Mega Backdoor Roth
A strategy using after-tax 401(k) contributions (beyond the standard pre-tax limit) followed by an in-plan Roth conversi...
Learn more ->Cost Basis
The original value of an asset for tax purposes, used to calculate gain or loss when the asset is sold or distributed....
Learn more ->Tax-Deferred
Growth or income that is not subject to income tax until it is withdrawn or distributed, allowing the full principal and...
Learn more ->Tax-Free Growth
Investment or savings growth that is never subject to income tax, as opposed to tax-deferred growth where taxes are simp...
Learn more ->Tax Bracket
A range of income subject to a specific income tax rate under the progressive federal income tax system. The US has seve...
Learn more ->Marginal Tax Rate
The tax rate that applies to the last dollar of income earned, which determines the tax cost of additional income....
Learn more ->Effective Tax Rate
The average rate at which a person's income is taxed, calculated by dividing total tax paid by total taxable income....
Learn more ->7702 Plan
A retirement savings strategy using permanent life insurance structured under Internal Revenue Code Section 7702 to prov...
Learn more ->IRC Section 7702
The section of the Internal Revenue Code that defines what qualifies as life insurance for tax purposes and establishes ...
Learn more ->IRC Section 101(a)
The section of the Internal Revenue Code that provides that death benefits paid under a life insurance contract are gene...
Learn more ->Net Investment Income Tax (NIIT)
A 3.8% surtax on net investment income (interest, dividends, capital gains, rental income, passive activity income) for ...
Learn more ->Alternative Minimum Tax (AMT)
A parallel tax system that limits certain deductions and requires high-income taxpayers to calculate their tax liability...
Learn more ->Income Tax-Free
Income or distributions that are excluded from federal and/or state income tax calculations, resulting in the recipient ...
Learn more ->Early Retirement
Retirement before the traditional retirement ages associated with full Social Security benefits (66-67) and Medicare eli...
Learn more ->Tax Diversification
A retirement planning strategy of holding assets in accounts with different tax treatments (pre-tax, after-tax, and tax-...
Learn more ->Sequence of Returns Risk
The risk that the timing of investment returns, particularly poor returns early in retirement when withdrawals begin, ca...
Learn more ->Ready to Put These Strategies to Work?
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