Resources

Active Participant: An employee who meets specific criteria and is entitled to participate in a particular company benefit, like a company pension or profit-sharing plan.

Actuarial Tables: Tables that are used to convert an annuity to a lump sum or to determine company contribution.

Adjusted Gross Income (AGI): Generally, your total income less: net business losses, net allowable capital losses, IRA and Keogh contributions, qualified student loan interest. The AGI figure is used as a basis for computing various tax calculations, including deduction and tax credit limitations.

After-Tax: Money you have earned after taxes have been deducted.

Annuity: A stream of payments from an insurance policy or a retirement account. Annuities basically come in two forms: 1) an immediate annuity in which the insurance company pays a fixed income starting today, and; 2) a deferred annuity which lets the money grow tax-deferred and pays an income in the future.

Asset Allocation: The composition of a person's investment portfolio designed to minimize risk. It should be based on a person's investment objectives.

Average Adjusted Earnings: Social Security adjusts your earnings for inflation and the number of years worked and then uses a specific formula to determine your actual benefit. The formula is weighted to favor low-income workers, since they have had less opportunity to save over the years.

Bond: Bonds are IOUs with three elements: face value (the value of the bond when it matures); maturity (the date when the holder receives the face value of the bond); and a coupon rate (the interest payment made to the bondholder by the issuer for use of their money).

Brokerage Firm: An institution that handles trades of marketable securities, including stocks and bonds. Full-service brokerage firms usually offer advice and provide services to help manage your investments. Discount brokerage firms typically do not offer advice, but do offer you lower transaction charges.

Capital Gain: The difference between the price at which you buy an investment and the price at which you sell it. Short-term capital gains are those where the property was held one year or less. Long-term capital gains are those where the property was held for more than one year.

Certificate of deposit: A deposit account into which funds are placed, not to be withdrawn until a specified time. CDs vary in terms of their maturities and yields.

Compensation: Wages and salaries, fees for professional services, and other amounts received for personal services rendered.

Compound Interest: Interest which is calculated at the end of each interest period on the sum of both the principal and interest already in the account.

Conduit IRA: An IRA set up exclusively to hold your qualified plan rollover generally for a short period of time, until you can roll it into a new employer's qualified plan.

Contributions: The amount of your pay that you elect to put into your retirement plan.

Corporation: A business entity whose ownership interests are shares of stock. Corporations are created under state law. A shareholder's liability is generally limited to his or her investment in stock of the corporation.

Deferred Annuity: Money that you leave with the insurance company to be paid to you as an income sometime in the future. Deferred annuities are used as tax-deferred savings accounts in which the money can be placed in either fixed or variable products, depending upon the type of annuity.

Defined Benefit Plan: A traditional pension plan that specifies the formula to be used to determine a future benefit (monthly income or lump sum payment) at retirement. Future benefits are definitely determinable on the basis of this formula.

Defined Contribution Plan: A plan in which your benefit is based on the amount contributed to an account on your behalf, plus earnings and possibly forfeitures of accounts of other plan participants. The amount you receive, typically a lump sum, depends on the investment performance of the underlying investments.

Diversification: The concept of reducing risk by investing your money in different types of investments.

Dollar-Cost Averaging: The systematic investment of a fixed dollar amount over a long period of time to reduce the risk of buying investments at peak prices.

Employee Stock Ownership Plan (ESOP): A qualified plan used to help employees save for retirement. The contributions to the plan are shares of the company stock—in essence, employees own a piece of their own company.

Filing Status: The status you use when filing your individual income tax return; includes single, head of household, married filing jointly, surviving spouse, and married filing separately.

Fixed Annuity: A contract with a life insurance company that provides the periodic payment of a fixed number of dollars for a specific period of time or for life.

Fixed-Income: An investment that pays you a stated amount of income. Bonds are an example of a fixed-income security.

401(k) Plan: A company retirement plan established under Internal Revenue Code Section 401(k) that allows employees to tax-defer income for retirement. No taxes are paid until a withdrawal is made from the employee's account.

Individual Retirement Account (IRA):A tax-advantaged retirement account, allowing individuals with earned income to contribute up to $6,000 in 2020 ($6,000 in 2019) into the account. Individuals age 50 or older are able to make additional catch-up contributions of up to $1,000 for 2020 and 2019. The contributions are sometimes tax-deductible, and earnings are not taxable until the account is drawn upon.

Inflation: An overall general upward price movement of all goods and services that erodes your purchasing power.

IRA Rollover: The deposit of funds from an employer-sponsored retirement plan or from another IRA into an IRA.

Keogh Plan: A qualified retirement plan for unincorporated business owners (sole proprietors and partners).

Life Expectancy: An actuarial assumption which determines the number of years an individual at a certain age can expect to live based on population statistics.

Liquidity: The ease with which something can be converted to cash typically without significant loss of principal.

Load Funds: A mutual fund with a sales charge generally distributed through brokers.

Lump Sum: A total distribution of an account balance.

Marginal Tax Rate: The rate of income tax you pay on each additional dollar of income.

Modified Adjusted Gross Income: A computation for purposes of IRA deductibility—generally, it is your adjusted gross income without subtracting your or your spouse's IRA deduction.

Money Market Fund: A fund that invests in short-term corporate and government debt and passes the interest payments on to shareholders. You have immediate access to your money and, often, check-writing privileges.

Money Purchase Pension Plan: A form of defined contribution plan in which the employer makes a mandatory contribution to an employee's account generally based on a fixed percentage of salary. The percentage does not vary from year to year.

Mutual Fund: A professionally managed pool of stocks, bonds, and other investments. The public invests by purchasing shares in the fund.

Mutual Fund Company: An investment company that is organized to invest the money of many people or institutions. The fund manager invests the money received into a diversified pool of assets. The assets selected depend on the objective of the fund.

Net Earnings from Self-Employment: A self-employed person's income from a business, taking into account allowable deductions for that business.

Net Total Return: Your total return on an investment after expenses.

Partnership: An unincorporated form of business, owned by two or more persons.

Pension Benefit Guaranty Corporation: A government agency that partially or fully guarantees your pension.

Portfolio: Refers to all of your investments, both inside and outside your retirement plans.

Pre-tax: The money you earn before taxes are deducted from it.

Principal: Your initial investment before interest is earned.

Profit-Sharing Plan: A form of defined contribution plan in which the employer can decide each year how much to contribute to the plan, if anything. It is typically based on the company's profitability, but the company is not required to make a contribution based on profits.

Prototype Document: An IRS pre-approved standardized document for a qualified retirement plan.

Qualified Employer Retirement Plan: An employer plan that meets complex requirements of the Internal Revenue Code. Contributions to qualified plans and the resulting earnings are generally tax-deferred.

Rate of Return: A measure of the performance of an investment expressed as a percentage of earnings to cash outlay.

Reimbursement Account: Accounts your employer sets up that allow you to pay for certain health and child care expenses with pre-tax dollars.

Risk Tolerance: How many swings in the value of your investments you are comfortable with.

Roth IRA: A type of individual retirement account (IRA) which will allow you to save money on an after-tax basis, and withdrawals are tax free provided you meet the eligibility requirements and holding period rules.

Savings: Money which you put away for the future.

Savings Incentive Match Plan for Employees (SIMPLE): SIMPLE plans may be adopted by employers with 100 or fewer employees who earn $5,000 during the preceding year. SIMPLE plans may be in the form of an IRA or part of a 401(k) plan. If you are part of a SIMPLE plan, you may not defer more than an IRS limit, set annually.

SEP: Simplified employee pension; A SEP is an employer retirement plan that uses IRAs as the funding vehicle.

Sole Proprietorship: An unincorporated business, owned by one individual.

Stock: Stocks are pieces of the corporate pie. When you buy stocks, or shares, you own a slice of the company.

Stock Bonus Plan: Employer contributions in the form of stock, rather than cash, may be made to a profit-sharing or 401(k) plans.

Stock Option: Stock options are merely the right to purchase a company's share of stock at a fixed price sometime in the future. The benefit is that you can enjoy the privilege of buying your company's stock at a discount, assuming the price goes up.

Stock Purchase Plan: These are arrangements under which all full-time employees meeting certain eligibility requirements are allowed to buy stock in their employer corporation.

Target Benefit Plan: A money purchase plan that determines contributions to an employee's account based on the amount necessary to fund a future benefit.

Tax-Deductible: An item that reduces gross income or adjusted gross income (AGI).

Tax-Deferred: Refers to an investment where interest earned (and sometimes the principal invested) is not taxed until the amounts are withdrawn.

Tax-Exempt: Income from investment is free of federal tax, but may be taxable for state income tax purposes and for federal alternative minimum tax purposes.

Tax-Free: Money that will not be taxed.

Thrift Plan: Company savings plans which allow you to make contributions from your salary. Contributions are made with after-tax earnings, but your account grows tax-deferred.

Time Horizon: The amount of time available to attain one of your financial goals.

Total Return: The total increase or decrease in the value of an investment based on the change in the market value of the investment, plus total interest or dividends paid.

Trustee-to-Trustee Transfer: Transfers to and from retirement plans where the money is directly transferred from plan to plan.

Two Percent Miscellaneous Itemized Deduction Rule: A tax rule that limits the deductibility of certain miscellaneous itemized deductions. Deductions must exceed 2% of adjusted gross income before they generate any tax benefits.

Variable Annuity: An annuity contract with a life insurance company under which the income paid to the owner varies, usually with the price of the underlying securities. A deferred variable annuity allows the owner to make contributions in a choice of separate investments or "sub-accounts."

Vesting: The employee's non-forfeitable right to benefits or monies earned. Retirement plans have vesting schedules, typically defining how long an employee has to be an active participant in a plan before he or she is entitled to a portion or all of the benefits earned. Stock option plans also have vesting schedules typically defining the length of time from the date options are granted until the date they can be used by the participant. The employee's own contributions to a qualified plan are always fully (100%) vested.

W-4: A form you fill out which tells your employer how much to withhold from your paycheck for federal income taxes.