In an effort to Create a Better Way we’ve created this list of commonly used terms in the self-directed world. To jump to a section, simply click one of the letter categories below.
Tax form that reports interest income for a given tax year.
Tax form that reports distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.
Tax form that reports IRA annual contributions and rollover contributions, as well as the Fair Market Value of every IRA as of December 31st each year.
Tax form that reports the annual return of employee benefit plans.
Individuals who fall under certain income and net-worth requirements set forth by the U.S. Securities and Exchange Commission (SEC).
An accredited investor, in the context of a natural person, includes anyone who:
- Earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
- Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold based on joint income for the years during which the person was married and based on individual income for the other years.
In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you:
- Any trust, with total assets more than $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
- Any entity in which all the equity owners are accredited investors.
In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.
More information can be found on the SEC’s website by clicking here (https://www.sec.gov/)
A document that is provided after the finalization of a prior transaction that lists any changes or updates to an original document that had been previously agreed upon.
A person or institution listed on an account to whom Provident Trust Group can give information. In most cases, it is the person or company who sold or assisted with the selection of the alternative asset that the client elects but may also include a partner, spouse, parent or child.
A document that indicates when payments will be due and the amount of the payments. It will also break down any applicable principal and interest amounts per payment. Amortization schedules are typically provided to the Lendee so that they know when the payments are due on the loan.
Articles of Organization
A legal document showing that the LLC is registered and active in a specific state. Typically, Articles of Organization list basic information such as the managers and members of the company and the address.
In an annuity purchase, the assignment is a document that assigns the payments over to the client’s account when the court order shows payments being made to another party.
If an original owner of an account dies, the person or entity designated as the “beneficiary” is the entitled party to receive the assets within the deceased person’s account. There are two types of beneficiaries:
- Primary Beneficiary: If the account owner passes away, the assets will be inherited by any living and willing primary beneficiaries
- Contingent Beneficiary: If all primary beneficiaries predecease the account owner or are not willing to accept the assets, the next in line to receive the assets is the contingent beneficiary.
Provident Trust Group cannot process beneficiary requests per stirpes.
An IRS-approved deposit of funds placed into a retirement plan for a given tax year, over the normal contribution limits. Individuals over the age of 50 are eligible to make these additional contributions.
Change of Ownership (COO)
A document created to show evidence of the change the ownership of an asset from one owner to another.
A guardian appointed by a court to protect the estate of an incapacitated person.
A deposit of funds placed into a retirement plan. The IRS sets certain contribution limits each year based on type of account, income earned, and the age of the account owner.
The maximum amount eligible to deposit into an account for a given tax year. The IRS may or may not change the contribution limit in a given year, so it is best to always consult the IRS website for the current contribution year.
In an annuity purchase, a court order is a legal document showing who and where the payments are to be sent; when there is no court order available, a “waiver” is needed in its place.
The custodian is the company that maintains the qualified account. Custodians do all of the tax-reporting necessary to maintain the qualified account (i.e. file the Form 5498 and any applicable 1099-Rs). Provident Trust Group is a custodian.
A person who has passed away.
Direction of Investment (DOI)
The form used by a client to direct Provident Trust Group to send funds to an investment of their selection. This form includes authorization for Provident Trust Group to execute purchase documents, direction on where and how to send funds and indicates the supporting documents needed for the purchase of an asset.
A person, as defined by the IRS, who benefits from a transaction on an investment within a qualified retirement plan. Disqualified persons include but are not limited to the account owner, their parents, grandparents and children.
A disbursement of qualified funds from a retirement account.
The jurisdiction in which a person lives and in which he or she intends to remain.
Income that is actively earned including wages, tips, salaries, commissions, and income from businesses in which there is material participation.
Employer Identification Number (EIN)
This is a company’s tax ID number. Provident Trust Group typically requires evidence of an EIN when sending funds to an entity in order to comply with various government acts and regulations including the Bank Secrecy Act and the USA PATRIOT Act.
Employee Retirement Income Security Act (ERISA)
ERISA is a federal law that sets minimum standards for most voluntarily established pension and health plans in private industry protection for individuals in these plans.
Excess Contribution Removal
Taking out a contribution made into an account in excess of the contribution limits for a given tax year. An excess contribution can be removed from an account at Provident Trust Group by submitting an Individual Distribution Request Form prior to all applicable deadlines.
The person who executes the terms of a will and administers the estate.
For Benefit Of (FBO)
A portion of ownership titling used by many institutions, including Provident Trust Group, to represent and clarify that we are acting as custodian on a client’s behalf and do not have direct ownership in the asset or investment. The correct titling for an asset purchase owned by a client’s account at Provident Trust Group is “Provident Trust Group LLC, FBO Client’s Name account type” (i.e. Provident Trust Group LLC FBO John Smith Roth IRA)
Fair Market Value (FMV)
The price at which the asset would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts. Unlike traditional investments such as publicly traded stocks or mutual funds, our clients’ assets are not readily valued. Every year, we request the account owner to provide us with the fair market value of their assets so we can properly report it to the IRS on the Form 5498.
The right, title, and interest in real or personal property that is enforceable by law.
Letter of Acceptance (LOA)
A notice, sent in conjunction with the Incoming Transfer Form that acknowledges that Provident Trust Group will custody the assets listed on the transfer form on behalf of the client’s account owned at Provident Trust Group.
An asset in debt; an entity that has money owed. Typical examples of liabilities in qualified accounts include mortgages used to purchase a Real Estate property with a non-recourse loan.
Limited Liability Company (LLC)
A corporation where the members of the company are not held personally liable for the company’s losses.
An agreement where a trustee has the legal possession of an original trust owners assts. The creator of the original trust has the right to amend or revoke the living trust at any time during their lifetime. Living Trusts are also known as Inter-Vivos Trust, Revocable Living Trust, or Family Trust.
Market Linked Certificate of Deposit (MLCD)
A certificate of deposit that is linked to the performance of a security on the market. MLCDs typically have a longer term to maturity (5 to 7 years) than a normal certificate of deposit.
A declaration of ownership in an LLC’s shares. Holders of membership interests typically have voting and profit interest in the company. LLCs can have multiple members or only one (i.e. a single member LLC).
This is a non-retirement account held at Provident Trust Group. Provident Trust Group still serves to custody these accounts and assets for clients, as it allows them to track their investments in a centralized location alongside their retirement account investments. The non-qualified account does not have the same tax-benefits as a retirement account, and they do not abide by the Employee Retirement Income Security Act (ERISA) guidelines.
In an annuity purchase, this document summarizes the terms of the amortization schedule and court order. An offer sheet is one of the supporting documents that Provident Trust Group requests when a client is investing into a secondary-market annuity.
For a company, this is a document that lists the terms of how the company will conduct its business. Operating Agreements are a required supporting document when submitting a Direction of Investment to send funds to purchase shares of an LLC (single member or multi-member) or private stock through an account held at Provident Trust Group. The Operating Agreement should include titling showing a membership interest in the name of Provident Trust Group, FBO CLIENT NAME ACCOUNT TYPE (Provident Trust Group, FBO John Smith Roth IRA) along with the names of all other members.
An account into which an individual puts assets in the care of a trustee for the use of the beneficiaries of the trust.
Power of Attorney (POA)
A written authorization to represent or act on another’s behalf in private affairs, business, or another legal matter. The person authorizing the other to act is the principal, grantor or donor (of the power) is assigning them as Power of Attorney over specific affairs. The POA documents typically contains restrictions regarding the circumstances in which the individual being authorized is allowed to act.
The original amount paid for an investment; excluding interest or earnings accrued.
Private Placement Memorandum (PPM)
Legal documents used by business owners of privately held companies to attract outside investors. It discloses everything the investor needs to know to make an informed decision about whether they want to invest in the company. It is sometimes referred to as an “offering memorandum” or “offering document.” These documents typically contain information used to inform the prospective investor about all aspects of the business including management, prior financial performance, and future prospects and risks related to the investment.
The IRS does not state which investments are permissible in a qualified account or retirement plan, but they do state specific asset classes that are prohibited. The IRS currently prohibits IRAs to invest into Life Insurance, Collectibles and S-Corps. Some examples of collectibles include:
- Metals – with exceptions for certain kinds of bullion,
- Coins – (but there are exceptions for certain coins),
- Alcoholic beverages, and
- Certain other tangible personal property.
For more information, click here for the IRS Website.
Transactions between a retirement account and a disqualified party. The IRS page Retirement Topics – Prohibited Transactions provides detailed information regarding who disqualified parties are to a plan or investment. Prohibited transactions can be made in a few different methods, including the exchange of goods, services, or payment.
For more information, click here for the IRS Website.
A legally binding agreement that documents a loan between two or more parties. It outlines the borrower’s promise to pay back a sum of money to the lender within a specific time period. Promissory notes should contain all the terms of the loan and repayment such as the principal amount, interest owed, and frequency or schedule or payments that the Lender can expect to receive. Promissory notes can be considered secured or unsecured. A secured promissory note, the lender would receive the previously-agreed upon asset or property that is standing as collateral for the note (i.e. shares of a company or a property), should the borrower default. An unsecured promissory note does not give the lender an opportunity to claim specific assets, if the borrower defaults on the loan, without additional legal action.
This document describes the terms that a buyer and seller is agreeing to in a purchase of an investment.
The IRS defines accounts that satisfy the IRS’s Internal Revenue Code qualifications in both form and operation. Typically, qualified accounts include Traditional, Roth, SEP and SIMPLE IRAs, 401(k)s [including Solo 401(k)s] and other retirement plans.
Movement of contributed funds from a Traditional IRA to a Roth IRA. Recharacterizations allow you to ‘undo’ a rollover or conversion to a Roth IRA. The amount being recharacterized is moved to a Traditional IRA either within the same institution or between institutions. This transaction must be completed by the due date for your tax return including extensions to avoid taxes that would otherwise be due.
Required Minimum Distribution (RMD)
This is an amount that is required to be taken from a Traditional IRA and other pre-tax retirement plans, when the owner of the account turns 70 ½. The required minimum distribution (RMD) is calculated based on the value of the account on December 31st of the prior year divided by the life expectancy table published by the IRS. As your custodian, Provident Trust Group will notify you by January 31st if you must take an RMD that year. Please see Provident Trust Group’s FAQ section for detailed information regarding transactions by clicking here (This is the website link for FAQs).
A trust in which the trustor reserves the power to alter or terminate the trust or assigns the right to do so to someone else.
A movement of funds or illiquid assets from one non-like account to another (i.e.: Traditional IRA to Solo 401(k)). Direct rollovers occur between two institutions. The funds or illiquid assets that are contained within the rollover are not in the account owner’s possession at any time throughout this exchange.
A movement of funds or illiquid assets from one retirement account to another [i.e.: Traditional IRA to Solo 401(k) or Traditional IRA to Traditional IRA]. When an indirect rollover occurs, the account owner takes possession of the funds or illiquid assets for a limited amount of time before remitting them to the second retirement account. Unlike a direct rollover, the indirect rollover must be completed within 60 days or less; therefore, the account owner cannot possess the funds or assets for an indefinite amount of time.
An intentional, taxable movement of funds or illiquid assets from a pre-tax retirement account to a post-tax retirement account. The most common accounts involved with a Roth IRA conversion are when an account moves funds or illiquid assets from a Traditional IRA to a Roth IRA.
A qualified account that contains after-tax dollars and earnings. The investments in this type of account grow tax-free. Please see Provident Trust Group’s page on Roth IRAs for additional information regarding the advantages to these types of qualified accounts.
A type of employer-sponsored retirement savings plan. SEP stands for Simplified Employee Pension Plan. The SEP IRA is a great option for self-employed individuals or small business owners. This type of qualified plan allows the business owner to potentially take a tax-deduction equivalent to the contributions made into the plan while saving for retirement. Please see Provident Trust Group’s page on SEP IRAs for additional information regarding the advantages to these types of qualified accounts. (this is the new SEP IRA page link)
A unit of ownership interest in a corporation or financial asset. Each share will have a value and price determined by the overall assets or potential growth of the corporation.
A type of employer-sponsored retirement savings plan. Simple IRA stands for Savings Incentive Match Plan for Employees. These plans are a great way to increase the amount you and your employees are saving for retirement. The SIMPLE IRA is an alternative option for self-employed individuals or small business owners (with 100 employees or less). SIMPLE IRA plans you to potentially take a tax-deduction equivalent to the contributions made into the SIMPLE IRAs each year (subject to government guidelines and income limitations). Please see Provident Trust Group’s page on Simple IRAs for additional information regarding the advantages to these types of qualified accounts. (this is the new Simple IRA page link)
Solo 401(K) (Solo K)
A type of employer-sponsored retirement savings plan for self-employed individuals. A Solo 401(k), [also known as a Self Employed 401(k) or Individual 401(k)], is a 401(k)-qualified retirement plan designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s).
A personal loan taken from the Solo 401(k) plan. You can borrow up to 50% of the vested value of your Solo (k) Plan or $50,000, whichever is less, and repay your plan for the loan over a period of up to 5 years.
The agreement document that will indicate the units being purchased by the member and the purchasing price. This document reserves and outlines the member’s commitment, but is not legally binding.
The entity or person of which was appointed by the original Trustee as the next Trustee if they should become incapacitated or die.
The purchase of a payment stream. This investment is transferred by a court document that pays the seller a lump sum while the purchaser or investor is paid in payments over a specific period of time, similar to an annuity.
A status which refers to investment earnings and their taxability. These earnings could include interest, dividends or capital gains and accumulate tax free over a period of time. Once the investor takes constructive receipt of the gains, they will be taxed at that time; therefore, delaying the taxes that must be paid until a later time.
A non-reportable, non-taxable movement of cash or assets between like-types of accounts (i.e.: Traditional IRA to Traditional IRA or Roth IRA to Roth IRA).
A document that outlines the rules of which the administrator will need to follow in regards to managing or overseeing specific property or assets. Typically, a trust will reduce estate tax liability or protect property within your estate.
As a licensed Trust Company, we comply with NRS 669.240.
License Number: TR10019
License Type: Trust Company
Documents that outline the terms of the trust.
A Company formed to act as a trustee or to assist with the duties outlined within trusts.
The person or entity who administers the trust.
The person that creates the trust. (Also known as Grantor or Settlor.)
Unrelated Business Taxable Income (UBIT)
A tax that applies to ordinary income received by an IRA or other retirement plan. This term is used to separate what income would be exempt from taxation in retirement plans and what income would still be subject to tax when earned in a retirement account. If UBIT is owed, the tax needs to be paid directly from the IRA. See IRC Section 511, IRS Publication 598, page 2 (2012), IRC Section 408 (e).
Unrelated Debt Financed Income (UDFI)
Applies to the income received by an IRA that is attributable to debt (IRC Section 514). Applies only when debt (such as a non-recourse loan) is used in combination with qualified funds to purchase an investment within an IRA. UDFI is a type of UBIT, so if UDFI is owed, it is owed at the UBIT tax rate. UDFI can be incurred annually or at the time of the sale of a property. UDFI only applies to IRAs; Solo (K) plans are exempt from UDFI.
A tax form that certifies the tax ID and classification for a person or entity.