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  • 401(k): A retirement plan that lets employees set aside part of their salary in a special account and control how the money is used in different types of investments. The account is tax-deferred, so the money is not taxed until it is withdrawn, ideally at retirement.
  • Adjusted Gross Income: Total income minus certain adjustments. This calculation is used in determining income tax liability.
  • Age Rule: The rule that says an individual must be under age 70 ½ to make a regular contribution to a Traditional IRA.
  • Annual Percentage Rate (APR): The annual rate that is charged for borrowing or made by investing. It may be different than the stated interest rate because it includes fees, insurance, and other costs.
  • Annual Percentage Yield (APY): The total interest that will be earned over the course of a year, taking into account the effect of compounding interest.
  • Annuity: A contract that guarantees fixed or variable payments over time. Annuities are tax-deferred and can be used to provide a steady stream of future income.
  • Assets: All items of economic value, such as cash, securities, accounts receivable, inventory, office equipment, a house, a car, or other property.
  • Asset Class: Type of investment - stocks, bonds, real estate, cash, etc.
  • Asset Allocation: The process of determining how investment funds will be divided among different asset classes, such as stocks, bonds, and cash reserves.
  • Balanced Investment Strategy: A strategy of building an investment portfolio to provide steady income while avoiding excessive risk.
  • Beneficiary: An individual, organization, or estate that receives benefits from a will, insurance policy, retirement plan, investment, or other contract.
  • Bond: A promissory note of a corporation. A bond is evidence of a debt on which the issuing company usually promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date. In every case a bond represents debt - its holder is a creditor of the corporation and not a part owner, as is the shareholder.
  • Certificate of Deposit (CD): An investment option with a set date of maturity and a set interest rate. CDs can be short or medium term and are generally administered by banks. Most CDs have an early withdrawal penalty for money removed before the maturity date.
  • Civil Service Retirement System: A pension plan for federal workers hired before 1984.
  • Compound Interest: A system of interest that adds the interest earned in the current period to the principal and computes the next period's interest on this "compounded" total amount.
  • Coverdell Education Savings Account: A type of account (previously called the Education IRA) designed to help fund a child's education. Contributions are not tax-deductible, but the distributions for qualified educational expenses are tax-free.
  • Custodial Account: An account administered by one person or entity (custodian) for the benefit of another person, usually at a bank, mutual fund or brokerage firm.
  • Death Distribution: The payment of IRA funds to a beneficiary upon the death of an IRA owner.
  • Deduction: Any expense allowed by the Internal Revenue Service to be subtracted from an individual's gross income before figuring a person's taxable income. Certain Traditional IRA contributions are classified as a tax deduction.
  • Defined Benefit Plan: A plan that guarantees that an employee will receive a specific benefit (generally a percentage of their salary) at retirement. The plan is funded by the employer, not the employee.
  • Defined Contribution Plan: A retirement plan that depends on the amount contributed by the employee and the earnings of those contributions rather than guaranteeing a set benefit amount.
  • Distribution: The withdrawal of funds from a retirement savings plan.
  • Diversification: A strategy for reducing risk by spreading investments among different types of investments and various companies in different industries.
  • Early (premature) Withdrawal: A withdrawal of funds from an IRA, 401(k), or any retirement plan before the age of 59 ½ or the specified age of maturity. Early withdrawals are subject to tax penalties, though there are some exceptions.
  • Earned Income Rule: A rule that determines an individual's eligibility to contribute to certain types of IRAs. For a Traditional IRA or Roth IRA, an individual must have earned income to contribute. Earned income includes but is not limited to wages, salaries, bonuses, tips, commissions and taxable alimony.
  • Education IRA: See Coverdell Education Savings Account.
  • Employer-Sponsored Retirement Plan: Any defined contribution or defined benefit retirement plan that is sponsored by an individual's employer. The most common types are 401(k), Profit Sharing Plans and Pension Funds.
  • Excess Contribution: Any IRA contribution that exceeds the maximum contribution limits permitted by law. Penalty taxes apply for each year an excess contribution exists.
  • Estate Planning: The preparation of a plan to administer and/or dispose an individual's assets after their death. Includes drawing up a will, setting up trusts, establishing power of attorney, and other arrangements.
  • Federal Employees' Retirement System (FERS): The current retirement system for federal employees. It became effective in 1987 and replaced the Civil Service Retirement System (CSRS) as the primary retirement plan for U.S. federal civilian employees. Retirement benefits are accumulated through Social Security benefits, a basic benefit plan, and a Thrift Savings Plan.
  • Individual Retirement Account (IRA): A tax-deferred personal retirement plan that allows an individual to set aside up to $5,000 per year. Contributions may be tax-deductible and earnings are not taxed until the funds are withdrawn at age 59½ or later. See also Traditional IRA and Roth IRA for more details.
  • Inflation: The overall increase in prices and costs, as measured by the Consumer Price Index and the Producer Price Index. As costs increase, the value of a dollar decreases because an individual cannot purchase as much with that dollar as they could previously.
  • IRA Rollover: The movement of IRA funds from one IRA provider to the account owner and then to another IRA provider. The account owner has 60 days to complete this transaction before the transaction is considered a taxable distribution of funds.
  • IRA Transfer: The movement of IRA funds directly from one IRA provider to another without the IRA owner taking receipt of the funds. This transaction is sometimes referred to as a Trustee to Trustee transfer.
  • Keogh Plan: A tax-deferred pension account for self-employed workers or employees of unincorporated businesses.
  • Life Expectancy: The average number of years an individual is expected to live based upon his or her current age. The current life expectancy in the U.S. is 78.2 years. Life expectancy calculations are used in determining the Required Minimum Distributions and Substantially Equal Periodic Payments for IRA distributions.
  • Lump Sum Distribution: The payment to a recipient of all funds accumulated in a 401(k) account or other tax-qualified plan within one taxable year.
  • Matching Contributions: Money contributed by an employer to an individual's 401(k) account based on the amount the individual contributes.
  • Medicaid: A program funded by the federal and state governments that pays medical expenses for those unable to afford them.
  • Medicare: An insurance program that provides medical care for the aged, provided under the Social Security Act.
  • Money Market Account: A savings account insured by the federal government and administered by a bank or other institution. It offers many of the same services as checking accounts, but transactions are more limited. Although very safe and highly liquid, this type of account may offer a lower interest rate than other investments.
  • Mutual Fund: A fund that combines money from many people and invests it in a portfolio made up of stocks, bonds or other assets.
  • Net Worth: The dollar amount of all the assets owned by an individual or organization minus their total liabilities (debts, obligations, etc.).
  • Pension: Benefits that an employee receives from their employer after they retire.
  • Pension Fund: A fund set up and invested by an employer or labor union to provide retirement income for workers. The funds accumulate income and capital gains tax-free and are used to pay retirement benefits to employees.
  • Portfolio: A collection of investments owned by an individual or organization. Often includes stocks, bonds, mutual funds, and other securities.
  • Power of Attorney: A legal document that gives one person (called the "agent" or "attorney-in-fact" the authority to make legal decisions and take actions (such as the signing of legal documents or administering investments) on behalf of another person (the "principal"). A power of attorney is often used when the principal is ill, disabled, or cannot be present to sign legal documents.
  • Principal: Can refer to: a) The amount borrowed in a loan; b) the amount of a loan which remains unpaid (excluding interest); or c) the original amount invested or deposited in an account.
  • Profit Sharing Plan: A plan that gives employees a share in the profits of the company. Each employee receives a percentage of those profits based on the company's earnings.
  • Qualified Retirement Plan: A plan that meets requirements of the Internal Revenue Code and therefore is eligible to receive certain tax benefits. These plans must be for the exclusive benefit of employees or their beneficiaries.
  • There are two kinds of qualified plans: defined-benefit plans and defined-contribution plans.
  • Rate of Return: The gain or loss on an investment over a specified period of time, expressed as a percentage increase over the initial investment cost.
  • Required Minimum Distribution (RMD): The minimum amount an IRA owner must withdraw each year beginning when he or she reaches age 70½, as required by the IRS.
  • Required Beginning Date (RBD): The deadline by which an IRA owner must take his or her first Required Minimum Distribution. The RBD is April 1 after the year in which the IRA owner turns age 70½.
  • Retirement: When a person chooses to leave the workforce.
  • Rollover: A tax-free movement of funds from one qualified retirement plan to another or to an IRA. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.
  • Roth IRA: A type of IRA established under the Taxpayer Relief Act of 1997 that allows IRA savings to grow tax-free. Contributions are not tax-deductible but withdrawals are not taxed at the federal level (subject to certain rules).
  • Roth IRA Conversion: The distribution of assets from a Traditional IRA into a Roth IRA.
  • Recharacterization: The reversal of a Roth IRA conversion or the redesignation of funds between plan types.
  • Self-directed IRA: An IRA that allows the individual to select the investment options that best fit their investment objectives.
  • Simple IRA: A Savings Investment Match Plan for Employees for companies with up to 100 employees that allows workers to put aside up to $6,000 per year. Employers can choose to match contributions dollar for dollar up to 3 percent of the worker's pay or make an across-the-board contribution of 2 percent to each eligible worker.
  • Simplified Employee Pension Plan (SEP): An employer-sponsored retirement plan designed for small business owners or self-employed individuals. Both employers and employees contribute to an IRA; contributions are tax-deductible and earnings are tax-deferred.
  • Social Security: A program to provide funds for disabled and retired individuals. Established under the federal Social Security Act of the Railroad Retirement Act.
  • Stock: A type of security signifying an ownership interest (equity) in a corporation and representing a claim on its proportional share in the corporation's dividends and net assets.
  • Substantially Equal Periodic Payments: A type of distribution from an IRA that may begin, without penalty, prior to age 59½. Substantially equal payments are calculated over the IRA owner's life expectancy.
  • Tax-deferred: An investment which accumulates earnings that are not subject to taxes until the investor withdraws money from the account or otherwise takes possession of the earnings. Tax-deferred retirement options include IRAs, 401(k) plans, Keogh plans, annuities and employee stock ownership plans.
  • Traditional IRA: The original IRA, designed to encourage individuals to save for retirement. The three benefits of a Traditional IRA are tax deferral of interest/earnings, potential tax deferral of contributions and assurance for a more financially secure retirement.
  • Treasury Note: A negotiable debt obligation issued by the U.S. government and backed by its full faith and credit, having a maturity of between two and 10 years.
  • Trust: A way for an individual (the "trustor") to give another individual or organization (the "trustee") the right to hold assets for the benefit of himself or third party (the "beneficiary"). There are two types of trusts:
  • 1. Living Trust: A trust that is established and in effect during the trustor's lifetime.
  • 2. Testamentary Trust: A trust that is created through a will and becomes effective after a person's death.
  • Uniform Transfers to Minors Act: A law enacted in most states that permits an adult (the custodian) to own property for the exclusive benefit of a minor. At the direction of the custodian, control over money in an UGMA/UTMA account is transferred automatically to the beneficiary when he or she reaches the age specified in the state's UGMA/UTMA statute.
  • Vesting: The point in time (generally determined by length of employment) when an employee gains the right to receive pension and other employer-contributed benefits.
  • Will: A legally enforceable declaration directing the disposal of a deceased person's property and assets.
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