401(k) Plan
- A qualified retirement plan established by employers which allows eligible
employees to make salary-deferred (salary-reduction) contributions on a pre- or
post-tax basis. Employers may make matching or partially matching contributions
to the plan on behalf of eligible employees; they may also add a profit-sharing
feature to the plan. Earnings accrue on a tax-deferred basis. (See also
Employee Contribution Plan.)
403(b) Plan
- A tax deferred retirement plan very much like the 401(k) [above], for
non-profit organizations (school, church, etc.).
Alternative Minimum Tax
- A method of calculating income tax that disallows
certain deductions, credits, and exclusions. This was intended to ensure that
individuals, trusts, and estates that benefit from tax preferences do not
escape all federal income tax liability. All taxpayers must calculate their
taxes both ways and pay the greater of the two.
Annuity
-
A form of contract sold by life insurance companies that guarantees a fixed or
variable payment to the buyer at some future time, usually retirement.
A FIXED Annuity pays out in regular (fixed) installments varying only with the payout method elected.
A VARIABLE Annuity pays out an amount that varies with the value of the account.
Asset Allocation
- The process of dividing investments among different kinds of assets,
such as stocks, bonds, real estate and cash, to optimize the risk/reward
tradeoff based on an individual's or institution's specific situation and
goals. A key concept in financial planning and money management.
Bond
(debt
security) - A negotiable, long-term debt instrument that carries certain
obligations (including the payment of interest and repayment of principal) on
the part of the issuer. Common
issuers are the Federal government (Treasuries), state and local governments
(Municipals) and businesses (Corporates).
Blackout Period
- 1. A temporary period of time in which enrollment access to a company
retirement or investment plan is limited or denied. 2. A period of time during
which employees of a company with a retirement or investment plan cannot modify
their plans.
Cash Value
- In a life insurance policy, cash value is the build-up in the owner's cash
savings. At any point in time, it represents the amount of money (before
adjustments) that would be returned to the policy owner upon cancellation of a
policy.
Cafeteria Plan
- An employee benefit plan which allows its members to choose from a
variety of benefits to formulate a plan that best suits their individual needs;
also known as a flexible benefit plan.
Capital Gain or Loss
- The difference between the sales price and the
purchase price of a capital asset. When that difference is positive, the
difference is referred to as a capital gain. When the difference is negative,
it is a capital loss.
Coverdell Education Savings Account (ESA)
- A tax-deferred account created by the U.S.
government to assist families in funding higher-education expenses.
Defined Benefit Plan
- A qualified retirement plan under which a retiring
employee will receive a guaranteed retirement fund, usually payable in
installments. Annual contributions may be made to the plan by the employer at
the level needed to fund the benefit. The annual contributions are limited to a
specified amount, indexed for inflation.
Defined Contribution Plan
- A retirement plan under which the annual
contributions made by the employer or employee are generally stated as a fixed
percentage of the employee's compensation or company profits. The amount of
retirement benefits is not guaranteed; rather, it depends upon the investment
performance of the employee's account.
Distribution
- A withdrawal of assets from a retirement account that are then paid to the
account owner or beneficiary. The account owner (or beneficiary) may be required
to pay income tax on distributions received during the year. Early-distribution
penalties may also apply if the distribution occurs while the account owner is
under the age of 59½.
Diversification
- The process of accumulating securities in different investments,
types of industries, risk categories, and companies in order to reduce the
potential harm of loss from any one investment.
Dividend
-
Distribution of earnings to shareholders, the amount is decided by the
company's board of directors and is usually paid quarterly. Dividends must be declared as income in
the year they are received.
Durable Power of Attorney (DPOA)
- A legal document conveying authority to an
individual to carry out legal affairs on another person's behalf.
Early Withdrawal
- The removal of funds from a fixed-term investment before its maturity
date, or the removal of funds from a tax-deferred investment account or
retirement savings account before a prescribed time, such as the account
owner's attainment of a minimum age requirement. An early withdrawal fee is
usually imposed, which acts as a deterrent to frequent withdrawals before the
end of the early withdrawal period.
Employee Contribution Plan
- A company-sponsored retirement plan which allows
employees to make salary-deferred deposits (contributions) into an account;
some companies match those payments. (See also 401(k) Plan.)
Estate
-
The overall planning of a person's wealth, including the preparation of a will
and the planning of taxes after the individual's death.
Heir
- A
person who inherits some or all of the estate of a recently deceased person.
The legal successor is usually related to the deceased by a direct bloodline or
has been designated in a will or by a legal authority.
Individual Retirement Account (IRA)
- A retirement investing tool that can be either an
"Individual Retirement Account" or an "Individual Retirement
Annuity". There are several different types: Traditional IRAs, Roth IRAs,
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs,
and Simplified Employee Pension (SEP) IRAs. Traditional and Roth IRAs are
established by individual taxpayers; Roth IRA contributions are not
tax-deductible. SEPs and SIMPLEs are retirement plans established by employers,
with individual participant's contributions being made to their own SEP- and
SIMPLE IRAs.
Inflation Risk
- Uncertainty over the future real (after-inflation) value of your
investment.
Intestacy
- The condition of dying without a legal will, upon which the government
assumes responsibility and determines the method by which assets are to be
distributed.
Keogh Plan
- A defined-benefit plan or defined-contribution plan established by a
self-employed individual for him- or herself and his or her employees.
Living Trust
- A trust created by a person during his or her lifetime.
Living Will
- A document instructing physicians, relatives, or others to refrain from the
use of extraordinary measures, as life-support equipment, to prolong one's life
in the event of a terminal illness.
Lump-Sum Distribution
- A one-time payment for the entire amount due (or
full distribution of funds made during the same tax year), rather than breaking
payments into smaller installments; some lump-sum distributions receive special
tax treatment.
Mutual Fund
- A pooled investment vehicle whose securities are managed for a fee (annual
management fee) by a professional investment advisor. Mutual Funds exist that invest in most investment
alternatives available (Stocks, Bonds, etc.).
Matching Contributions
- A type of contribution that an employer chooses to make to his or her
employee's employer-sponsored retirement plan, based on elective deferral
contributions made by the employee.
Over-contribution
- Any contribution to a tax-deductible retirement savings plan which
exceeds the maximum allowed contribution for a given period of time as
determined by the retirement plan's registrar; they are usually subject to some
form of monetary penalty intended to reduce their occurrences.
Pension Fund
- A fund established by an employer to facilitate and organize the investment
of employees' retirement funds contributed by both the employer and employees.
The fund is a common asset pool meant to generate stable growth over the long
term, providing pensions for employees when they reach the end of their working
years and begin retirement.
Pension Plan
- A retirement plan (often tax exempt) into which an employer makes
contributions for his or her employees. Many pension plans are being replaced
by the 401(k).
Qualified Retirement Plan
- Also known as a Qualified Plan, a plan which meets
specific requirements set forth in the Internal Revenue Code and, as a result,
is eligible to receive certain tax benefits.
Risk
-
Possibility that an investment's actual return will be different than expected;
includes the possibility of losing some or all of the original investment.
Measured by variability of historical returns or dispersion of historical
returns around their average return.
Revocable Trust
- A trust in which provisions can be altered or canceled by the
grantor. During the life of the trust, income earned is distributed to the
grantor, and only after death does property transfer to the beneficiaries. This
is the opposite of an Irrevocable Trust, which cannot be modified or terminated
without the permission of the beneficiary.
Roth IRA
-
Individual retirement plan. Contributions are not deductible and qualified
distributions are tax free.
Rollover
-
1. The process of transferring the holdings of one retirement plan into another
without suffering tax consequences. 2. The process of reinvesting funds from a
mature security into a new issue of the same or similar security
Social Security
– The comprehensive federal program of benefits providing workers
and their dependents with retirement income, disability income, and other
payments. The Social security tax is used to pay for the program.
Yield
- In
general, the yield is the amount of current income provided by an investment.
For stocks, the yield is calculated by dividing the total of the annual
dividends by the current price. For bonds, the yield is calculated by dividing
the annual interest by the current price. The yield is distinguished from the
return, which includes price appreciation or depreciation.
