Glossary A–Z

Your total gross income minus specific above-the-line deductions. AGI is the starting point for calculating MAGI and determines eligibility for many deductions and credits.

Converting an annuity's accumulated value into a stream of regular income payments. Once annuitized, the process is generally irrevocable. The exclusion ratio applies to non-qualified annuity payments.

The strategy of placing specific types of investments in the account type (taxable, tax-deferred, or tax-free) where they receive the most favorable tax treatment — without changing the overall portfolio allocation. See: Asset location strategy →

A two-step strategy for high earners who exceed the Roth IRA income limit: make a non-deductible traditional IRA contribution, then convert it to Roth. Legal and IRS-acknowledged. The pro-rata rule must be managed. See: Backdoor Roth IRA →

The original value of an asset for tax purposes — typically what you paid for it. Capital gains are calculated as the sale price minus the basis. A step-up in basis at death resets the basis to the fair market value at the date of death.

A Fixed Indexed Annuity that credits a cash advanced premium bonus — typically 15–20% — at the time of deposit. Used in the Self-Completing Roth Version B strategy to offset Roth conversion tax costs. See: Bonus FIA →

The strategy of deliberately managing taxable income each year to stay within optimal tax brackets — converting traditional IRA funds to Roth when bracket headroom exists, avoiding unnecessary income that would push into the next bracket. See: Tax bracket management →

The maximum interest rate an FIA can credit in a given year, regardless of how much the index gains. If the S&P 500 gains 20% and the cap is 10%, you earn 10%.

A type of charitable remainder trust that pays a fixed dollar amount annually to the income beneficiary. Contributions cannot be added after funding. See also: CRUT. See: Charitable remainder trusts →

An irrevocable trust that allows appreciated assets to be transferred in, sold without immediate capital gains, and used to fund lifetime income — with the remainder passing to charity. See: CRT →

A type of charitable remainder trust that pays a fixed percentage of the trust's value annually — recalculated each year. Allows additional contributions. Generally preferred over the CRAT for inflation protection.

A provision in an irrevocable trust (typically an ILIT) that gives beneficiaries a temporary right to withdraw any contribution, making the gift qualify for the annual exclusion. Named after a court case. Most beneficiaries do not actually withdraw, allowing the trustee to use the funds to pay insurance premiums.

An annuity where income payments start at a future date chosen at purchase — commonly 10–20 years later. Used as longevity insurance to guarantee income in advanced age. See: Immediate vs. deferred annuities →

The portion of the deceased spouse's federal estate tax exemption that was not used at death. Portability allows the surviving spouse to elect the DSUE amount, effectively combining both exemptions.

The percentage of each annuity payment that represents a tax-free return of the owner's original after-tax investment. Calculated as: investment in contract ÷ expected total return. Applies only to non-qualified annuities that have been annuitized. See: Annuity tax treatment →

An annuity that credits interest based on a market index (e.g. S&P 500) up to a cap or participation rate, with a 0% floor guaranteeing no principal loss in down markets. Tax-deferred growth. Not directly invested in the market. See: Fixed indexed annuities →

IRS form used to report non-deductible IRA contributions and track your after-tax basis in traditional IRAs. Must be filed each year you make a non-deductible contribution or execute a backdoor Roth conversion.

Medicare Income-Related Monthly Adjustment Amount — Life-Changing Event form. Used to appeal an IRMAA surcharge triggered by a one-time income event. Qualifying events include retirement, death of a spouse, and loss of income. Roth conversions do not qualify. See: IRMAA →

An optional rider on a fixed indexed annuity or variable annuity that guarantees a minimum annual withdrawal amount for life — regardless of account value. The benefit base often grows at a guaranteed rate during accumulation.

An irrevocable trust where the grantor transfers assets and receives an annuity back for a fixed term. If assets appreciate faster than the IRS hurdle rate, the excess passes to heirs gift-tax-free. See: Irrevocable trusts →

A federal tax on transfers to beneficiaries who are more than one generation below the transferor (e.g. grandchildren). The GST exemption mirrors the estate tax exemption — $13.61M in 2024.

A health insurance plan with higher deductibles and lower premiums that qualifies the policyholder to contribute to an HSA. Minimum deductible of $1,600 (individual) or $3,200 (family) in 2024.

The only account with a triple tax advantage: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. After age 65, functions as a traditional IRA for any expense. See: HSA →

An irrevocable trust that owns a life insurance policy, removing the death benefit from the grantor's taxable estate. Death proceeds pass to beneficiaries income-tax-free and estate-tax-free. See: ILITs →

A Medicare premium surcharge applied to high-income beneficiaries based on MAGI from two years prior. Even $1 over a threshold triggers the full tier surcharge. A 2-year lookback means income decisions today affect premiums two years from now. See: IRMAA — Medicare stealth tax →

A permanent life insurance policy with cash value growth linked to a market index, a 0% floor, tax-deferred accumulation, and tax-free income via policy loans. No RMDs. Used in the Self-Completing Roth Version A strategy. See: IUL →

The IRS rule for annuity withdrawals: gains (the last money "in") are withdrawn before principal (the first money "in"). All gains are taxable as ordinary income before any tax-free basis is recovered. Applies to partial withdrawals from non-qualified annuities.

AGI with certain deductions added back. Used to determine eligibility for Roth IRA contributions, IRMAA thresholds, the Social Security benefit taxation formula, and various other income-based thresholds. Policy loan income does not count toward MAGI.

A life insurance policy that has been funded too quickly — failing the IRS 7-pay test. MECs lose the tax-free policy loan treatment and are subject to LIFO taxation on distributions, similar to annuities. Premium structuring is critical to avoid MEC status.

A fixed annuity with a guaranteed interest rate for a set term (typically 2–10 years). Tax-deferred growth. The CD alternative — same principal protection and guaranteed rate, but no annual 1099. See: Fixed annuities (MYGA) →

The difference between the cost basis of employer stock in a 401(k) and its fair market value. Under the NUA strategy, stock distributed as a lump sum is taxed at long-term capital gains rates on the appreciation — rather than ordinary income rates if rolled to an IRA. See: 401(k) strategies & NUA →

A method used by FIAs to limit upside — a percentage of the index gain is credited. A 70% participation rate on a 20% index gain = 14% credited. An alternative to cap rates.

The IRS rule that applies when converting a non-deductible IRA contribution to Roth: if you have any pre-tax IRA balances, all IRAs are treated as one pool and the taxable portion is calculated proportionally. The critical constraint on the backdoor Roth strategy. See: Backdoor Roth IRA →

A dividend option in participating whole life insurance where dividends are used to purchase additional paid-up coverage. PUAs increase both the cash value and death benefit immediately, with no additional underwriting.

A direct transfer of up to $105,000 (2024) from an IRA to a qualifying charity, made by an IRA owner age 70½ or older. QCDs satisfy RMDs and are excluded from gross income entirely — the most tax-efficient charitable giving strategy available. See: QCDs & NUA →

A deferred income annuity funded with IRA dollars (up to $200,000) that defers required minimum distributions until income begins — as late as age 85. The only annuity structure that directly reduces RMDs. See: Immediate vs. deferred annuities →

The minimum amount the IRS requires you to withdraw annually from tax-deferred retirement accounts beginning at age 73 (or 75 if born on/after 1/1/1960). Calculated by dividing the prior year-end account balance by the IRS Uniform Lifetime Table factor. Failure to take RMDs results in a 25% excise tax. See: RMD planning →

Moving funds from a traditional IRA or pre-tax 401(k) into a Roth IRA. The converted amount is taxable as ordinary income in the year of conversion. No income limit. Each conversion tranche starts its own 5-year clock. See: Traditional vs. Roth IRA →

The Setting Every Community Up for Retirement Enhancement Acts of 2019 and 2022. Key changes: eliminated the stretch IRA for most non-spouse beneficiaries (10-year rule), raised RMD ages to 73 and 75, added catch-up provisions. See: RMD planning →

A proprietary strategy in which the tax cost of a Roth conversion is effectively paid by another vehicle rather than directly out of pocket. Version A uses an IUL death benefit. Version B uses a Bonus FIA's cash advanced premium bonus. See: Self-completing Roth →

An irrevocable trust funded by one spouse (the grantor) with the other spouse as beneficiary. Removes assets from the taxable estate while preserving indirect access through the beneficiary spouse. See: SLATs →

An annuity funded with a lump sum that begins paying income within 30 days. Income is guaranteed for life or a fixed period. Non-qualified SPIAs use the exclusion ratio. See: Immediate vs. deferred annuities →

The reset of an asset's cost basis to its fair market value at the date of the owner's death. Heirs who inherit assets in taxable accounts pay no capital gains tax on appreciation that occurred during the decedent's lifetime. Does not apply to IRA or 401(k) assets.

The 2017 tax law that roughly doubled estate tax exemptions and reduced individual income tax rates. Most individual provisions expire December 31, 2025 — creating the 2026 conversion and gifting window. See: Tax bracket management →

A tax-free transfer from one annuity to another annuity, or from a life insurance policy to an annuity. Preserves tax deferral without triggering a taxable event. Must involve the same owner. See: Annuity tax treatment →

The IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale. Critical constraint on tax-loss harvesting. Does not apply to gains. See: Tax-loss harvesting →