401(k) Plan: Employer-sponsored, qualified plan that permits employees
to make pretax contributions from their salaries to a profit-sharing
plan, a target benefit plan or a stock bonus plan. The great news is
contributions and earnings grow tax deferred until withdrawn.
403(b) Plan: A retirement plan for employees of non-profit organizations,
public schools and churches where employees can contribute a portion
of their salary into a mutual fund or annuity. As with a 401(k) plan,
contributions and earnings grow tax deferred until withdrawn.
457 Plan: A deferred compensation program for employees of state
and federal governments and agencies. A 457 plan is similar to a 401(k)
or 403(b) plan, except there are never employer matching contributions
and the IRS does not consider it a qualified retirement plan. Earnings
grow on a income tax-deferred basis and contributions are not taxed
until the assets are distributed from the plan, usually in retirement.
72(t): It’s an IRS rule relating to IRAs or qualified retirement
plans that makes it possible to avoid the 10-percent early withdrawal
penalty if distributions are taken before age 59-½. Under Rule
72(t), an investor younger than 59-½ may choose to receive
“substantially equal periodic payments” determined by
several factors, including the age and life expectancy of the owner,
age of the beneficiary, the size of the investment and the interest
rate. The equal periodic payments must continue until you reach age
59-½ or for a minimum of five years, whichever is longer. All
the income you receive is fully income taxable but without any added
penalty.
Adjusted gross income: This is the income amount on which a taxpayer
computes deductions that are based on, or limited by, a percentage
of his or her income in order to figure out federal taxable income.
AGI is determined by subtracting from gross income any deductible
business expenses and other allowable adjustments (some traditional
Individual Retirement Account annual contributions, SEP and Keogh
annual contributions, and alimony payments).
After-tax retirement income: The amount of spending money needed,
net after tax, to provide an investor with his or her desired lifestyle.
Can be thought of as their annual budget in retirement or their total
planned annual spending in retirement.
Aggressive: An investment approach that takes higher risks in return
for potentially higher rewards.
Annuity: A contract that provides for a series of payments to be
made or received at regular intervals. An annuity may be immediate,
starting as soon as the premium has been paid, or deferred, starting
at a designated later date. Annuities are commonly used to fund retirement.
Asset allocation: Investment strategy whose purpose is to enhance
total return and/or reduce risk by diversifying assets among different
types of stocks, bonds and money market investments; i.e., variety
is the spice of investment life.
Average annual total return: Represents the average annual change
in value of an investment over time, including changes in share price
and income (dividends or interest) expressed as a percentage. In other
words, it's roughly how much you made (or lost).
Bear market: A term used to describe the stock market when prices
have been declining in value.
Beneficiary: An individual, institution, trustee, or estate that
receives, or may become eligible to receive, benefits under a will,
insurance policy, retirement plan, annuity, trust, or other contract.
Bull market: A prolonged period in which investment prices rise faster
than their historical average. Bull markets can happen as a result
of an economic recovery, an economic boom or investor psychology.
COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985): Law
guaranteeing most Americans continued health care coverage when they
leave a job. Premium payments are the responsibility of the individual,
and there are fees too, which tends to make this one of those expensive
laws to utilize.
Capital gain or capital loss: Profit or loss from the sale of a capital
asset. A capital gain, under current federal income tax laws, may
be either short-term (less than one year) or long-term (more than
one year). A short-term capital gain is taxed at the reporting individual's
full income tax rate. A long-term capital gain is taxed at the reporting
individual's income tax rate with a maximum rate of 15 percent.
Catch-up provision: A provision in 401(k), 403(b), plans and IRAs
that allows some participants to make contributions over the usual
annual limit if they have not maximized their contributions in earlier
years.
Compound interest: The interest that accrues when earnings for a
specified period are added to the principal, so that interest for
the following period is computed on the principal plus accumulated
interest. Interest is calculated on reinvested interest as well as
on the original amount invested.
Consumer price index (CPI): An inflationary indicator that measures
the change in the cost of a fixed "basket" of products and
services, including housing, electricity, food, and transportation.
Also called cost-of-living index.
Deferred Compensation: A contractual agreement between an organization
and an employee wherein the organization makes an unsecured promise
to defer the compensation of the employee to some future date for
services currently performed by the employee.
Defined benefit plan: A company retirement plan, such as a defined
benefit plan, in which a retired employee receives a specific benefit
based on salary history and years of service, and in which the employer
bears the investment risk. Contributions may be made by the employee,
the employer, or both.
Defined contribution plan: A company retirement plan, such as profit
sharing, money purchase pension, 401(k) or 403(b), in which each participant
has an individual account within the plan with benefits based solely
upon amounts contributed and the past performance of that account.
The participant bears the investment risk.
Diversification: Spreading investments among different companies
in different fields. Another type of diversification is offered by
the securities of many individual companies because of the wide range
of their activities.
Dollar-cost averaging: A system of buying securities at regular intervals
with a fixed dollar amount. Under this system you buy by the dollar's
worth rather than by the number of shares. If each investment is the
same number of dollars, payments buy more shares when the price is
low and less when it increases. Temporary downswings in price therefore
benefit you if you continue to make periodic purchases in both good
times and bad, and the price at which the shares are sold is more
than their average cost. Keep in mind that periodic investment plans
do not assure a profit or protect against loss in declining markets.
Consider your financial ability to continue purchases through periods
of low price levels.
Earned income tax credit: A federal income tax credit for low-income
working individuals and families. Eligible taxpayers need to fill
out a special EITC worksheet when filing taxes. The size of your tax
credit depends on your income and number of family members. Like any
credit, the EITC reduces the amount you owe the government. If the
size of your credit is larger than your total tax bill, you'll get
a refund.
Federal Deposit Insurance Corporation (FDIC): A federal agency that
insures deposits in member banks and thrifts up to $100,000.
FICA payroll taxes: FICA is an acronym for "Federal Insurance
Contributors Act," and is the federal law which requires employers
to withhold a portion of employee wages and pay them to the government
trust fund which provides retirement benefits (more commonly known
as Social Security). If you want us to fax you the facts on FICA tax,
leave your name and number at the tone.
Full retirement age: The age at which someone is eligible for full
retirement benefits from the government. If you were born after 1942,
your full retirement age is 66, and it's 67 if you were born after
1960.
Individual retirement account (IRA): A tax-deferred personal retirement
account that allows a person to invest up to $3,000 (or 100% of compensation,
whichever is less) each year. Your contribution may be tax deductible
depending on your adjusted gross income, whether you're married and
whether your employer offers a retirement plan at work.
Inflation: General rise in price of goods and services resulting
in a loss of purchasing power.
Investment objective: The result desired by an investor or mutual
fund, such as current income or capital appreciation.
Keogh Plan: A tax-saving retirement program for self-employed people
and their employees.
Long-term capital gain or loss: A capital gain or loss on an investment
which was held for at least some minimum amount of time (often a year
and a day). A long-term gain usually results in a lower tax rate than
a short-term gain.
Maximum taxable amount: As it relates to FICA payroll taxes, the
amount of your annual income that is subject to taxes for future Social
Security benefits. In 2004, earnings over $87,900 are not taxed.
Medicaid: A program, funded by the federal and state governments,
that pays for nursing home and in-home health care for those who can't
afford it.
Medicare: A federal program that pays for certain health care expenses
for people age 65 or older.
Medigap: Medigap or Medicare Supplement policies are private insurance
policies that pay for care that is approved but not paid by Medicare.
Medigap policies will not pay for services not covered by Medicare.
Pension Plans: Plans for employees of some corporations or government
entities where the employer is obligated to provide either annual
contributions or an annual benefit to the participant at retirement.
Prospectus: The document that offers securities for sale to the public.
It must explain the offer, including the terms, planned use of the
money, historical financial statements and other info that could help
investors decide whether the investment is suitable for them. The
prospectus is required under the Securities Act of 1933.
Qualified Domestic Relations Order (QDRO): In divorce proceedings,
a QDRO is an order from the court (as opposed to order in the court)
to the retirement plan administrator, which allows one spouse to receive
benefits from the other spouse's company-sponsored retirement plan.
Risk tolerance: It's the measure of an investor's ability to accept
risk. Investors are often categorized as risk-indifferent, risk averse
or risk-seeking.
Rollover IRA: A tax-free reinvestment of a distribution from a qualified
retirement plan into an IRA within a specific time frame, usually
60 days. These transfers can happen when leaving a job at an employer
that offered a retirement plan such as a 401(k). The company can issue
a check for the amount minus 20% in withheld taxes. To avoid this
penalty, the rollover must be done trustee to trustee, meaning that
the check is made out to the new trustee or custodian of the rollover
IRA.
Roth IRA: A personal retirement savings vehicle created by the Tax
Payer Relief Act of 1997 available for certain investors beginning
in 1998. A Roth IRA allows certain investors to make non-deductible
contributions of up to $3,000 annually, and provided certain requirements
are met, offers (after owning the Roth for five years) income tax-free
and penalty-free withdrawals for important specified financial needs
as qualified distributions. Distributions after age 59-1/2 are income
tax-free provided you have had the Roth IRA for five years before
you withdraw funds.
SEP (Simplified Employee Pension Plan): A retirement program for
self-employed people or owners of small companies allowing them to
defer taxes on investments intended for retirement.
Short-term capital gain or loss: A capital gain or loss on an investment
that was held for less than some minimum amount of time (often a year
and a day). A short-term gain usually results in a higher tax rate
than a long-term gain.
Social Security: The government-sponsored program we hear so much
about which is designed to provide basic pensions and disability income
for U.S. citizens.
Spousal IRA: A working spouse may contribute to an Individual Retirement
Account for a non-working spouse up to $3,000 annually. You must file
a joint return and have adjusted gross income below $160,000.
Tax-deferred retirement plans: A retirement plan in which you get
to postpone current income taxes on pre-tax money invested or any
earnings in an account until you withdraw it from the plan. Such a
plan may allow you to set aside part of your pay for retirement. Tax-deferred
accounts include traditional and rollover IRAs and employer-sponsored
retirement plans.
Vested: The rights of an individual to receive benefits from employment,
such as pension, sick leave and vacation. Pension benefits are vested
when the employee has worked a specified number of years. The person
may then leave the employer for another job and still collect the
accumulated amount at retirement.
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