1035 Exchange: Procedure used to move funds from one tax-deferred retirement account to another. If it is done properly the money involved keeps its tax-deferred status. The 1035 was named for the IRS regulation that allows such an exchange.
401(a) Plan: A tax-deferred employee retirement plan under which the amount and nature of the contributions is determined by the employer. Both employers and employees can contribute to it but the employer has control of the arrangement.
401(k) Plan: A retirement plan that enables an employee to put a percentage of his or her pay into a tax-deferred investment account. Employers have the ability to match contributions. The IRS places significant restrictions on who can take advantage of 401(k) plans and the amounts that can be invested in them.
403(b) Plan: A tax-deferred retirement plan that is only available to public school system employees, some members of the clergy, federal employees, and employees of qualified non-profit organizations. A 403(b) plan is often called a tax-sheltered annuity because the funds can be invested in either annuities or mutual funds.
408(k) Plan: A tax-deferred retirement plan designed for businesses with fewer than 25 employees. Under a 408(k) the employee, not the employer, owns the account. 408(k) plans are also available to self-employed individuals.
457 Plan: A tax-deferred retirement plan that has no 10% tax penalty for withdrawals made prior to 59½ years one of age. The 457 is available to government employees and contractors.
529 Plan: A tax-deferred college savings plan akin to a 401(k). A 529 plan can only be operated by a state government or a qualified educational institution. A 529 plan can also be a prepaid tuition arrangement set up by a college.
Accumulation Phase: The period of time when funds are added to a deferred annuity to increase its future value. Any interest earned during the accumulation phase is reinvested. The accumulation phase ends when the annuitant starts receiving payments.
Adjusted Gross Income: Total taxable income of an individual or couple. Adjusted gross income or AGI is usually calculated by subtracting tax deductions from total income.
Administration Expenses: The cost of the professional and other services needed to maintain an account or the estate of a deceased person. Examples of administration expenses in estate planning include lawyers and accountants' fees, tax preparation costs, and moneys spent maintaining property owned by the estate. Mutual funds and other accounts managed by financial institutions often come with a 1-3% administration fee.
Alternative Minimum Tax: A provision in the federal tax code requiring some taxpayers to pay a set amount of income tax regardless of deductions. The alternative minimum tax or AMT only affects individuals with high income levels, usually $75,000 a year.
Amortization: The process used to determine the amount of the payments of a loan such as a mortgage. Amortization is usually calculated by adding the principal and the amount of interest and dividing that figure by the number of payments. Amortization can also refer to a process by which loss of property value over time is calculated.
Annual Percentage Rate (APR): The yearly interest rate charged on a credit card, loan, line of credit, or mortgage. The APR includes both the interest rate and any fees the lender adds to the cost of the loan. An annual percentage rate is the cost of borrowing money.
Annual Percentage Yield (APY): A method used to calculate the yearly return on an investment such as a money market account. The APY is figured by adding the amount of interest earned and any compound interest reinvested each year. Any fees charged for the management of the investment are subtracted from the APY.
Annuitant: A person receiving payments from an annuity. An annuitant is also called a beneficiary. The annuitant does not have to be the purchaser of the annuity contract.
Annuitization: A method of payment in which a beneficiary receives funds through a series of equal payments over a predetermined period of time. Annuitization also refers to the process by which funds are transferred to an annuity or the beneficiary of an annuity.
Annuity: A contract that obligates an insurance company to make payments to an individual over a period of time. Annuities are created by paying funds to an insurance company that promises to disperse them in the future. An annuity can be purchased as an investment or used to disperse funds to someone else.
Asset Allocation: The process by which an investor distributes money across a portfolio of investment vehicles of varying degrees of risk. Similar to but different from diversification, asset allocation involves the use of different investment classes, like stocks, bonds, mutual funds, and treasures.
Asset Class: A category or group of investments used for asset allocation. An asset class encompasses investments of similar characteristics and risk. Examples of asset classes include: stocks, bonds, mutual funds, treasures, and precious metals.
Bank Trust Custodial Account: An individual retirement account set up through a bank. Contributions to this plan can be invested in bonds or other vehicles such as mutual funds.
Bear Market: A major fall or decline in the value of stocks and other equities usually caused by large sell offs. Bear markets are also called down markets. A bear market is the opposite of a bull market.
Beneficiary: A person that receives or inherits funds from an insurance policy. The beneficiary is usually named in the policy itself. Beneficiary is also another term for the annuitant or recipient of the payments from an annuity.
Bequeath: To leave possessions, funds, or benefits to an heir in a will. Bequeath can also mean to transfer property or rights to another individual.
Blackout Period: A period of time when access to an account or investment is blocked or limited for any reason. 60-day blackout periods are often imposed when employers make changes to retirement plans.
Blue Chip: A stock in a well-known and well-respected company that is able to retain its value in even a bad economy. Blue chip can also refer to stocks on the Dow Jones Industrial Average. The term blue chip comes from high value chips in poker.
Bond: An interest-bearing security issued to raise money for an organization. A bond pays its holder interest but does not convey ownership like stock The three most common types of bonds are: Federal, municipal, and corporate.
Brokerage Window: A person's power to direct trading in stocks and other investments through an IRA. Brokerage window can also refer to the limitations placed upon such trading.
Bull Market: A period of time when the stock market is gaining in value with a rising level of investment. A bull market is the opposite of a bear market. Bull market can also refer to a period of frenzied or irrational stock buying.
Cafeteria Plan: A benefit plan that lets employees choose from a wide variety of different benefits. A cafeteria plan might give employees access to several different kinds of retirement account.
Capital Gains: Income earned from the increase in value of assets or investments. Such funds are subject to the federal capital gains tax.
Capital Growth Strategy: An investment strategy that emphasizes the increase in value of assets over the interest earned on them. The idea behind such a capital growth strategy is increase the amount capital available to an investor.
Carryover Basis: The formula by which the tax value of investments is calculated when they are transferred to a new owner. Carryover basis is usually determined by the value of the asset at the time of the change of ownership. Carryover basis does not apply when investments are sold.
Cash Surrender Value: The amount of cash a person receives when he or she surrenders or cancels an insurance policy. Cash surrender value usually applies in the case of whole life insurance policies.
Catch-Up Contribution: An additional payment people over 50 can make to tax-deferred retirement accounts to make up for funds they didn't invest when they were younger. The current limit to catch-up contributions on IRAs is $6,000 a year for individuals. There is no such limit on annuities.
Certificate of Deposit (CD): A promissory note in which a bank agrees to repay the initial investment with compounded interest when it matures. A CD is insured by the FDIC and pays higher interest than a savings account. A penalties are levied on withdraws before a CD matures.
Certified Employee Benefit Specialist (CEBS): A person who has completed a program of education in employee benefits sponsored by the Wharton School of Business and the International Foundation of Employee Benefit Plans. CEBS is not an official license or government sponsored status.
Certified Financial Planner (CFP): An investment advisor that completed the education and testing program offered by the Certified Financial Planner Board of Standards Inc. A CFP is not to be confused with a securities or insurance license.
Certified Public Accountant (CPA): An accountant that has passed the uniform CPA examination offered by the American Institute of CPAS. A CPA will have to be licensed by the state in addition to having earned this designation.
Certified Senior Consultant (CSC): A financial planner who has completed the CSC program offered by the Institute of Business & Finance. A CSC completes special coursework that emphasizes the financial problems facing senior citizens.
Chartered Financial Consultant (ChFC): A financial advisor who has earned the accreditation for financial consulting offered by the American College (an insurance industry organization). A ChFC is not to be confused with a Chartered Financial Analyst, a similar accreditation popular in some foreign countries.
Chartered Life Underwriter (CLU): An expert in life insurance and estate planning who has received the CLU accreditation offered by the American College (a professional organization for insurance underwriters). To earn a CLU, an individual must complete coursework in life insurance and pass a test. A CLU must have an insurance license issued by the state.
Cliff Vesting: A provision that requires an employee to work at a company for a specific period of time to get the benefits from a retirement plan. Under cliff vesting employees can not receive pension benefits or take retirement funds with them until they have worked at the firm for a certain number of years.
Commodities: Raw materials, crops, fuel, minerals, precious metals, and other items that are traded on exchanges similar to the stock exchange. Commodity investors usually purchase futures or derivatives based on the item's potential value rather than the actual commodities.
Common Stock: A stock that gives an investor a voting right in a company. The owner of a common stock has the right to vote for directors and officers of the company and vote on corporate policy.
Compound Interest: An investment strategy in which interest earned is used to purchase more of an investment. Many retirement investments rely upon compound interest to generate additional income.
Conduit IRA: An individual retirement account that only contains funds rolled over from another retirement plan. Additional contributions cannot be made to a conduit IRA. Money in a conduit IRA can be rolled over into another plan in a 1035 exchange.
Confining Condition: A health problem that confines a person to his or her home, a nursing home, or a hospital. A history of confining conditions in an applicant's family can affect some insurance rates.
Conservatorship: A legal status in which a judge rules a person is not capable of managing his or her finances and other affairs. In a conservatorship, the judge appoints somebody else to look after that person's property and finances.
Consolidated Omnibus Budget Reconciliation Act (COBRA): Federal law under which an individual who has been laid off or leaves his or her job retains employee health insurance for a period of time. COBRA can significantly reduce the cost of health benefits for such people.
Contingent Beneficiary: A person who can legally receive benefits from an insurance policy if the primary beneficiary dies. The contingent beneficiary is usually named in the policy.
Conveyance: Any document that legally transfers ownership of a property, right, or investment from one person to another. Examples of a conveyance include deeds and leases.
Corporate Bond: An arrangement in which investors loan money to a corporation in exchange for interest payments. A corporate bond does not give its holder ownership or voting power in the business.
Corporate Pension Plan: An arrangement in which a company agrees to provide its employees with financial support at retirement. A corporate pension plan can take the form of a traditional pension, annuities, or IRAs.
Cost of Living Allowance (COLA): An automatic increase in income or benefits designed to offset increases in inflation and the cost of living. COLAs are usually based on the Consumer Price Index.
Coverdell Education Savings Account (ESA): A tax-deferred savings account that lets parents and students save up to $2,000 a year to cover future education costs. Coverdell Education Savings Accounts can only be set up for those under 18 and some individuals with special needs. Funds can remain in an ESA until the beneficiary reaches age 30.
Consumer Price Index (CPI): The standard measure of the prices of consumer goods and services in the United States. The CPI is considered to be one of the most important economic indicators and an a weathervane for the rate of inflation. The Consumer Price Index is compiled by the US Bureau of Labor Statistics.
Credit Shelter Trust (CST): A structured trust that enables married couples to avoid estate taxes. Under a CST, assets are passed directly to beneficiaries to bypass the inheritance tax. A CST also gives a surviving spouse access to assets and income.
Custodial Account: A bank or investment account managed by somebody other than the account's owner. Custodial accounts are often used to manage funds or investments owned by children and the disabled.
Death Distribution: The payment of funds to a beneficiary after the owner of a financial instrument such as an IRA dies. It can also refer to the distribution of funds in an annuity after the death of the annuitant.
Death Tax: A popular nickname for the federal inheritance or estate tax. The death tax only affects certain kinds of income and assets held by individuals with fairly high incomes. Death tax can also refer to similar state taxes.
Debt Financing: Any means of raising funds or borrowing money that involves the creation of debt. Debt financing includes credit cards, loans, corporate bonds, bonds, and various other instruments.
Deduction: A deliberate reduction in the estimate of income used for the determination of income tax obligations. The amount of income tax a person owes is usually calculated by subtracting the amount of deductions from his or her annual income.
Deferred Annuity: An annuity purchased through a series of payments made over a period of time. A deferred annuity contract has two parts: an accumulation period in which funds accumulate and annuitization when money is paid out. Payments from a deferred annuity do not begin until the accumulation period ends.
Defined Benefit Plan: A retirement plan in which the benefits are determined by qualifications set by the employer. Defined benefit plans often base benefit amounts on factors such as length of employment. A defined benefit plan does not usually allow employees to decide where the funds are invested.
Defined Contribution Plan: An arrangement under which an employer contributes a specific amount of money to an employee's retirement account on an annual basis. Defined contribution plan payments are usually made to tax-deferred vehicles such as 401(k)s and IRAs. A defined contribution plan gives employees more control over the investment of funds.
Deflation: An economic condition in which prices and values of items fall while the value of money increases. Deflation is the opposite of inflation.
Derivative: A security that is based upon the potential value of an underlying asset such as a commodity, equity, or financial obligation. A person who buys a derivative is betting that the value of the underlying asset will increase in the future. Derivatives are also called futures.
Diversification: Investment strategy in which funds are placed in a number of different stocks or assets to reduce the risk of losses. Diversification is the strategy behind most indexed investments.
Dividend: A regular payment made from a corporation to holders of most kinds of stock, including common stock. A dividend is only paid if the company issuing the stock makes a profit. Dividends are usually paid on a yearly basis.
Dollar Cost Averaging: The strategy of always buying the same dollar amount of an investment at regularly scheduled intervals. The value of the purchase never changes, but the amount of shares bought rises and falls with the value of the investment.
Dow Jones Industrial Average: An index of the stock of thirty of the largest and most prestigious companies traded on the New York Stock Exchange. The Dow Jones Industrial Average or Dow is considered to be an important indicator of America's economic health. The Dow is named for the two men who created it in the 1920s, Charles Dow and Edward Jones.
Early Withdrawal: The withdrawal of funds from a retirement account or deferred annuity before the age of 59½. A 10% tax penalty is assessed on most early withdrawals from retirement accounts. Early withdrawal can also refer to taking funds out of a deferred annuity during the accumulation phase.
Earned Income Rule: IRS regulation that states a person must have earned income to be able to contribute to a Roth or Traditional IRA. Earned income refers to money earned from a job, investments, or business activities. The earned income rule bars individuals whose income comes from sources such as government benefits from participating in IRAs.
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA): Federal Law that made it easier to roll IRAs over into other plans and created the "catch-up contribution" for older workers. The EGTRRA also lowered income tax brackets and effectively repealed the estate tax. Many of the tax provisions of the EGTRRA are scheduled to end in 2011 if Congress does not reinstate them.
Education IRA: An inaccurate nickname for the Coverdell Education Savings Account. The ESA is a tax-deferred account used to save for education and not a retirement savings vehicle.
Emerging Market: A nation where industry and a modern economy are still developing. Emerging markets often have much higher rates of growth and present tremendous opportunities for investors. Emerging markets can also present great risks for investors because they are volatile.
Employee Contribution Plan: An arrangement in which employees contribute a portion of the funds to a retirement plan. The contributions are usually made through deductions from the workers' pay. Employee contribution plans usually channel the funds collected into IRAs.
Employee Retirement Income Security Act (ERISA): Federal law that regulates voluntary health insurance and retirement plans offered by primary employers. ERISA sets the standards for such plans and gives workers the right to sue employers that violate those rules. ERISA does not cover benefit plans offered by governments and religious organizations.
Employee Savings Plan: A contribution plan that lets employees put part of their salaries into tax-deferred savings accounts. Employee savings plans can be used to save for retirement or for other needs such as education or home purchase.
Employer-Sponsored Retirement Plan: A retirement plan offered to employees by an employer. An employer-sponsored retirement plan can take many forms, but it is usually funded by automatic deductions from employees' salaries and supplemented with employer contributions.
Equity Financing: The use of the potential value of a piece of property as collateral for a loan or line of credit. Examples of equity financing include mortgages, home loans, home equity lines of credit, and reverse mortgages.
Estate: A legal device used to manage the property and assets of a deceased person. An estate must have an executor and is subject to taxes.
Estate Planning: The steps a person takes to dispose of his or her assets and property after death. Estate planning usually involves the writing of a will, naming beneficiaries, and efforts to limit tax liabilities.
Estate Tax: A federal income tax that only applies to the estates of wealthy individuals, popularly called the "death tax." The current estate tax rate is 35% but it only applies to estates worth more than $5 million.
Exchange Traded Fund (EFT): A stock fund based on a stock portfolio that is traded on a commodities exchange. An EFT's value is based upon an index of stocks such as the S&P 500 or a commodity such as gold. Individuals can invest in EFTs directly or through mutual funds or variable annuities.
Executor: The person that takes charge of the deceased's legal and financial affairs. An executor is either named in the will or appointed by a court. The executor is legally obligated to enforce the provisions of the deceased's will.
FDIC: The FDIC or Federal Deposit Insurance Corporation is the federal agency that regulates most banks in the United States. The FDIC insures most bank accounts for up to $100,000. It also has the power to take over banks that are in danger of collapsing.
Federal Employee Retirement System (FERS): A retirement plan for civilian employees of the US government hired after 1986. FERS takes deductions from federal workers payrolls and puts them into Social Security, and two retirement benefits. FERS does not cover uniformed members of the military or veterans.
Fiduciary: A person entrusted with managing someone else's assets or finances. A fiduciary may look after the assets of a child or a person who has been incapacitated.
Financial Plan: A roadmap for the financial future of an individual, couple, or family. A financial plan can cover topics like retirement planning, debt repayment, savings, estate planning, investment, and tax planning.
First-Time Home Buyer: A person or couple that is purchasing a home for the first time. First-time home buyers are entitled to a number of tax credits and benefits under the present federal tax code.
Five-Year Rule: One of two options that a beneficiary has when he or she inherits an individual retirement account. The five-year rule requires the funds in a retirement account to be distributed within five years of the owner's death.
Form 1099-R: Form used to report income or losses from investments for income tax purposes. A separate 1099-R must be filed for each investment listed on an individual's tax return.
Form 5329: A tax form that must be filed with a tax return if the taxpayer has taken an early withdrawal from a retirement account or annuity. Form 5329 must be filed to be eligible for exemptions from the early withdrawal penalty.
Form 8606: A tax form that a person must file if he or she has made a nondeductible contribution to an IRA. Form 8606 may also have to be filed if an individual has rolled over an IRA which contains nondeductible contributions.
Fully Funded: A pension or retirement plan which is completely paid for by an employer. Fully-funded pension plans are now very rare because of their cost to employers. Most employers have now switched to retirement accounts with matching contributions.
Fully Vested: When an employee has receives full access to a benefit such as a retirement account under a vesting schedule. An individual usually has to work for an employer for several years to become fully vested.
Gift Tax: A federal tax that applies to any transfer of money, assets, or property worth more than $13,000 where no payment is received in return. Charitable contributions, political contributions, and gifts to pay medical and tuition expenses are not subject to the gift tax. The amount of gift tax owed is determined by the carryover basis for the gift.
Guaranteed Death Benefit: A provision to an annuity contract that provides the annuitant's beneficiary with a guaranteed payment even if no funds are left in the plan at the time of death. A guaranteed death benefit is a common feature in most annuities.
Guardian IRA: An individual retirement account set up in the name of a minor child or an adult who is not capable of managing his or her own affairs. A guardian IRA provides a tax-deferred savings device to pay for a person's future expenses.
Hardship Withdrawal: An early withdrawal from an IRA made because of an emergency or unavoidable circumstances. Hardship withdrawals do not have to be paid back but they are subject to income tax and the 10% tax penalty for individuals under 59½years old.
Healthcare Power Of Attorney (HCPA): The legal power to make decisions about someone else's healthcare or medical treatment. HCPA is often granted when somebody is incapacitated or unable to make decisions on their own.
Hedge Fund: A private investment fund that tries to generate large returns by employing aggressive investment strategies. A hedge fund is usually an unregulated private partnership that is open only to investors with large amounts of money.
Heir: An individual who inherits a deceased person's assets or property. An heir is usually named in a will and can also be called a beneficiary.
Highly Compensated Employee: A person who is not eligible to participate in most tax-deferred retirement plans because his or her income is too high. A highly-compensated employee is usually defined as somebody who makes more than $110,000 a year. Highly-compensated employees often have special retirement arrangements that are separate from the normal employee plan.
Holographic Will: A handwritten will that has not been formally witnessed or notarized. Holographic wills are not allowed in all states. To be legal such a document cannot be typed and it must be signed.
Home Equity: Excess value in a home that can be used as collateral for loans, second mortgages, and lines of credit. The amount of home equity is determined by subtracting the amount owed on the mortgage from the home's value.
Independent 401(k): A 401(K) designed for self employed individuals and the owners of small businesses. An independent 401(k) offers the advantage of covering the self-employed person's spouse. The independent 401(k)'s main drawback is that it can only cover one person and his or her spouse.
Individual Retirement Account (IRA): Tax-deferred savings mechanism through which a person can invest a specific amount of money for retirement each year. An IRA can be used to invest in a wide variety of assets including stocks, bonds, mutual funds, and annuities.
Inflation: Economic condition in which the value and buying power of money decreases as consumer prices increase. Inflation can destroy the value of many kinds of investments. Investments with a low return are especially susceptible to inflation.
Inflation Risk: The risk that inflation will undermine the value of currency, assets, investments, and savings. Investments with a low return such as fixed-rate annuities and savings accounts have the greatest inflation risk because they have low interest rates. Inflation risk can be offset by purchasing high-yield investments.
Inflation-Protected Annuity (IPA): An annuity that has some features designed to provide a rate of return that exceeds the rate of inflation. IPA features may include a guaranteed rate of return or indexed investments.
Intestate: The legal status of a person who dies without a valid will. The distribution of an intestate person's estate is usually determined by a probate court.
Investment Consultant: Any professional that advises people on the purchase, retention, or sale of investments. Investment consultant is an informal title that does not indicate any special knowledge, expertise, experience, education, or training.
Investment Objective: The purpose or long-term goal that motivates any investment or investment strategy. Common investment objectives can include retirement planning, tax-deferral, financial security, and wealth building.
Irrevocable Trust: A trust that cannot be abrogated under normal circumstances. An irrevocable trust can only be revoked or modified by a change of the law or a court ruling.
Junk Bond: A bond designed to finance a questionable or high-risk venture that cannot find financing elsewhere. Junk bonds are riskier than other bonds but they often have a high rate of return.
Keogh Plan: A tax-deferred retirement plan intended for small businesspeople and others who do not have access to employer-sponsored plans such as 401k accounts. It is named for Eugene Keogh, the Congressman who wrote the legislation that created such vehicles. A Keogh plan gives a self-employed individual the same investment options as a 401K.
Large Cap Stock: Stock in a big company that has a large market capitalization. Large market capitalization is generally defined as having issued $10 billion or more worth of stock.
Liability: The legal obligation to settle debts or claims on behalf of an individual or organization. Liability can also refer to vulnerability to a lawsuit or similar legal action.
Life Expectancy: The number of years that a person is expected to live under normal circumstances. Life expectancy is usually determined by a mathematical formula based on medical science and historic statistics. Life expectancy is often used to calculate life insurance rates.
Liquid: A financial instrument that can quickly be converted to cash or used in transactions. Liquid indicates a state of liquidity.
Living Trust: Legal document that transfers ownership of property or assets to someone else without giving up any control. A living trust can help a person transfer property or assets to an heir without entering probate. A person who places an asset in a living trust retains the rights to buy, sell, or transfer it.
Locked In: A feature in a financial product is locked in when it is guaranteed by a legal contract. Locked in interest rates and guaranteed payments are common features in annuities.
Longevity Risk: The risk that a person will live so long that they will exhaust their savings and retirement investments. Longevity risk is now one of the major concerns of retirement planning. Products designed to offset longevity risk include annuities and "longevity insurance."
Lump-Sum Distribution: The distribution of all of the funds in a financial instrument, such as an annuity, in one payment. Lump-sum distributions often incur income tax penalties and may require the payment of withdrawal fees.
Lump-Sum Payment: The funding of an investment, commonly an annuity, with a single upfront payment as opposed to monthly deposits.
Matching Contributions: Payments to a retirement account from an employer that match an employee's contributions. Matching contributions to taxed deferred IRAs are now a common employee benefit.
Medicaid: Federal program that pays for medical care for low income persons without health insurance. Medicaid funds are distributed through the states. Medicaid also pays some health and long-term care expenses that are not covered by Medicare.
Medicare: Federal program that covers most costs of healthcare for older Americans. Medicare only covers those over 65 and some persons on Social Security disability. Medicare does not cover all medical and health insurance costs for those over 65.
Medigap: Health insurance policies that are designed to pay healthcare expenses that are not covered by Medicare. Medigap refers to the gaps in Medicare that don't pay the full costs of prescription drugs and other needed treatments.
Mid Cap Stock: Shares in a company with a market capitalization of $2 to $10 billion. Mid cap is short for middle capitalization.
Modified Adjusted Gross Income (MAGI): The amount used to determine what percentage of an IRA contribution is tax deductible. MAGI is usually calculated by adding certain kinds of deductions back to the IRA holder's adjusted gross income.
Money Market Account: Savings account that offers a higher rate of interest in exchange for larger deposits. Money market accounts are often used to provide funds for other investment in stocks and other vehicles.
Mortality and Expense Risk Charge: Extra fee charged to purchasers of life insurance policies who are considered to be more likely to die in the near future. Morality and expense risk charges are often found on policies for persons over 88 years old and individuals with risky occupations or adverse health conditions.
Municipal Bond: Bond issued to finance the activities or projects of a local government such as a city, county, town, or special district. Municipal bonds are a popular investment because interest on them is tax-exempt.
Mutual Fund: A professionally-managed fund in which money is pooled and invested in specific equities, commodities, or securities. Mutual funds are a popular vehicle for retirement investing because they allow for diversification of small portfolios.
Nest Egg: Slang term for funds saved for a specific purpose such as retirement, education, or home-purchase. Nest egg can also refer to additional funds saved for emergencies and other purposes.
Net Worth: The amount left over when a person's liabilities and debts are subtracted from the value of his or her property and assets. Net worth includes projected future income from salaries, business activities, and investments.
Non-Qualified Plan: A tax-deferred retirement plan or account that does not meet ERISA guidelines. Non-qualified plans are often made available to executives and independent contractors.
Non-Qualifying Investment: An investment that does not qualify for any sort of tax-deferment or tax-exemption. Non-qualifying investment can also refer to instruments or holdings that do not meet ERISA requirements.
Pension: An arrangement that provides retired individuals with a regular source of income. A pension does not require any sort of contributions and usually has no tax benefits. Pensions were traditionally provided as a fringe benefit to employment.
Phased Retirement: An option that lets an employee slowly cut his or her workload back over a period of time rather than retire completely at a certain age. Phased retirement can include part-time work, consulting work, and reductions in hours.
Portfolio: A package of investments such as stocks that is often included in arrangements such as mutual funds and variable annuities. A portfolio is designed to reduce an investor's vulnerability to market fluctuations by placing funds in many different instruments.
Preferred Stock: A kind of stock that gives its owner a share of ownership but no voting rights in a company. Preferred stock owners have priority over general stock owners in claiming assets and dividends.
Price/Earnings Ratio (PE Ratio): The ratio between a company's valuation and its earnings. The PE ratio is often used to estimate whether a company is overvalued. The PE ratio is only an estimate and should never be taken as objective.
Principal: The amount of funds the borrower actually receives in a loan. Principal can also refer to the amount of money an investor places in an investment. Principal plus interest is part of the formula used to calculate loan amortization.
Probate: Legal term used to describe the procedures used to administer the estate of a deceased person. Probate procedures and courts often determine the distribution of an estate when a valid will is not available.
Prospectus: A legal document that describes all the details, risks, stipulations, and fees associated with an investment or financial instrument. A prospectus must be made available to every potential investor or purchaser under SEC regulations.
Qualified Plan: Any retirement plan that meets the IRS's requirements for tax-deferred retirement investment vehicles. A qualified plan can be any one of a wide variety of popular retirement and savings plans.
Quality Of Life: The level of freedom, material comfort, health, security, and wealth a person needs to be reasonably happy. Quality of life should be the factor used to determine the amount of retirement income an individual needs.
Rabbi Trust: A variety of trusts set up by businesses and other entities to defer taxation. Rabbi trusts are used to set up tax-deferred savings or retirement accounts for executives, independent contractors, and other individuals not covered by traditional retirement plans. These vehicles are called "rabbi trusts" because the IRS decision that first created them involved a synagogue.
Rate of Return: The amount of money that an investment earns over time through dividends, interest, and increase in value. The rate of return can be affected by many factors, including the market, risks, and investment strategies.
Rebalancing: The adjustment of the investments in a portfolio to bring it back into line with the investment strategy that is being used. In a rebalancing, a conservative investor might sell off equities with increased risks.
Recharacterization: A contribution that is actually made to one IRA but is listed as being made to another for tax or bookkeeping purposes. Recharacterization is often used to simplify records for rollovers.
Required Minimum Distribution: The minimum amount that an IRA holder must start withdrawing from the plans at age 70½ to keep the funds tax-deferred. Required minimum distribution applies to all IRA holders including those who are still working at age 70.
Retirement Planner: A financial professional that helps set up finances and investments for retirement. Retirement planner is an informal term that anybody can adopt. A retirement planner can receive a number of voluntary certifications and accreditations.
Reverse Mortgage: An arrangement in which the equity in a person's home is used as collateral for the purchase of an annuity designed to provide retirement income. Reverse mortgages are only available to persons of age 62 or older. A reverse mortgage may only be taken out on the annuitant's primary residence.
Revocable Trust: A type of trust designed to be easy to cancel or revise. A revocable trust gives its creator the right to revoke the vehicle at any time. A revocable trust's provisions and features can be changed at anytime.
Roth 401(k): A 401(k) plan that is funded with after-tax contributions which effectively eliminates the income limits for IRA participation. A Roth 401 (k) also enables persons over age 59½ to make tax-free IRA withdrawals.
Roth IRA: A type of retirement plan that is more flexible than a traditional IRA. Roth IRA contributions are not tax-deductible but payments from a Roth IRA are tax-exempt. Roth IRAs take their name from US Senator William Roth who wrote the legislation that created them.
Rule 72(t): IRS regulation that lets IRA holders make tax-free withdrawals from their plans before they reach age 59½ without incurring the 10% tax penalty. Rule 72(t) withdrawals are still subject to regular income tax.
S&P 500: The popular name for the Standard & Poor's 500, a list or index of the 500 largest publicly-traded companies in the United States. The S&P 500 is compiled by ratings firm Standard & Poor's and lists stocks traded on several different exchanges. The S&P 500 is often used to compile portfolios for indexed investments.
Saver's Tax Credit: The tax break that lower income people receive for putting money into a tax-deferred retirement plan. The saver's tax credit amount is based upon the taxpayer's adjusted gross income and the amount of the contribution.
Securities: A general term for investment various investment vehicles. Securities can be either debt instruments, like bonds or banknotes, or equity instruments, like stocks or futures.
Self-Directed IRA (SDIRA): An individual retirement account that gives its owner the right to make all of the investment decisions. A SDIRA owner decides what investments will be purchased but the investments are administered by a custodian.
Shares: The amount of ownership in an enterprise that a stock purchaser receives. A share of stock represents a percentage of ownership in a company. Shares can also represent the amount of ownership an investor has in an investment fund.
Simplified Employee Pension (SEP): An IRA designed for small businesses and self employed persons. A SEP allows an employer to make tax-deductible contributions to an IRA without having to administer it.
Single-Life Payout: Retirement plan payments that stop when the retiree dies. Single-line payout is one of two retirement payment options available. The other is joint-line payout in which the benefit can be transferred to a spouse.
Small Cap Stock: Stock in a smaller company with a market capitalization under $2 billion. Small cap stocks can have greater potential returns but often carry more inherent risks.
Social Security: A federal program that provides a guaranteed income to older Americans and the disabled. Social Security is funded by payroll and income taxes. Social Security payments begin at age 62 but most people can not receive the full amount until age 67.
Split-Funded (Split) Annuity: An annuity that provides both regular income payments and the ability to save more money in a tax-deferred product. A split annuity is two products in one: a deferred annuity and an immediate annuity, combined into one contract.
Spousal IRA: An IRS rule that lets a person without an IRA contribute up to $5,000 a year to a spouse's individual retirement account. To qualify for this arrangement the couple must file a joint income tax return. Persons over 50 years of age can invest up to $6,000 per year into a spousal IRA.
Standard of Living: A set of measurements used to determine the cost of earning a living in a particular geographic area. The standard of living is often used to determine the success of a particular economy or economic policy.
Stock: An investment based up a share of ownership in a company. A stock give can its owner certain rights such as voting rights. Stock value is determined by the value of the company that issues it.
Stretch Annuity: An annuity contract that allows beneficiaries to leave funds in the plan after the annuitant's death. A stretch annuity enables the heirs to maintain the tax-deferred status of the funds.
Superannuation: A pension plan that is completely under the control of the organization that sets it up. Under superannuation all of the funds are controlled by the employer and distributed at the discretion of the employer.
Surrender Fee: The fee the owner of an instrument such as an annuity has to pay to withdraw all the funds at once. A surrender fee is often charged to take money from a deferred annuity before annuitization begins.
Tax Avoidance: Legal measures taken to reduce the amount of taxes a person has to pay. Tax avoidance is not to be confused with tax evasion, which refers to illegal efforts to avoid paying taxes. Tax avoidance is a legitimate wealth-building strategy.
Tax Credit: An amount of money added to a person's tax refund by the government. Tax credits are used to encourage behaviors the government considers beneficial. Tax credits are based upon formulas found in the tax code.
Tax-Deferred: Status in which funds are not subject to taxation as long they remain in a certain kind of account or investment such as an IRA or an annuity. Tax-deferred funds are subject to taxation once they leave the tax-deferred mechanism.
Tax-Free: An arrangement in which funds are not subject to taxation. Tax-free is also called tax exempt. Tax-free is not to be confused with tax-deferred.
Tax-Sheltered Annuity (TSA): A retirement plan in which funds are deducted from an employee's pay and invested in an annuity. TSAs or 403 (b) plans were among the first tax-deferred retirement plans available to average Americans. Tax-sheltered annuities are only available to certain individuals such as public school teachers.
Teacher Retirement System (TRS): A retirement plan for teachers and other public school employees usually operated by a state government. A TRS gives its members the right to place a portion of their salaries in 403 (b) plans. TRS members can invest these funds in tax-sheltered annuities or IRAs.
Taxable Income: The percentage of a person's income used to calculate his or her income tax rate. Taxable income is usually calculated by subtracting tax deductions, expenses, and losses from earnings.
Technical Analysis: The use of statistics based upon market results in an effort to predict the future performance of securities, commodities, and equities. The idea behind technical analysis is that figures such as price and volume are the best predictors of an investment's future earnings. Charts and computer programs are used to try to determine the future value of shares.
Term Life Insurance: A very basic life insurance policy that only provides coverage for a limited period of time. Term life insurance can provide a large amount of coverage for a low premium. Term life insurance policies expire when the term ends so premiums can increase over time.
Time Horizon: The amount of time for which an investor plans to hold an investment. Time horizon is usually based upon investment strategy and the objectives of the investment owner.
Treasury Note: A security based upon federal government debt that is issued by the US treasury. Treasury notes pay interest every six months and can be bought and sold like any other security. The phrase T-Note is a popular slang term for "Treasury note."
Triggering Event: An event or circumstance that activates or triggers a provision in a contract. A triggering event can require signatories to a contract to carry out certain actions. The death of an annuitant is often the triggering event for the dispersal of annuity funds to beneficiaries for example.
Trust Fund: A legal mechanism that administers funds or assets on behalf of a person or group of people for a specific period of time. Trust funds are usually dispersed to beneficiaries at some point specified by the terms of the trust.
Trustee: The person or entity that is placed in charge of a trust. A trustee is obligated to administer the trust following the provisions set down by its creator. A trustee is usually obligated to disperse the funds in the trust at some point.
Universal Life Insurance: Permanent life insurance that offers both a death benefit and cash value. Universal life insurance can be used as an investment or loan collateral because funds in the policy that exceed the premium are liquid. Universal life insurance policies have flexible premiums because they have cash value.
Variable Life Insurance: Life insurance policies in which funds that exceed the premium can be invested in equities or securities. Variable life insurance policies serve as both an investment portfolio and an insurance policy.
Variable Universal Life Insurance (VUL): Universal life insurance that offers both a death benefit and an investment portfolio. In a VUL, cash value that exceeds the premium amount is placed in a portfolio of investments to increase the policy's value.
Vested: The right to access funds in an investment vehicle such as a 401(k). Vested interest is accrued interest that can only be withdrawn after it has accumulated for a specific period of time. With vested investments, the investor has to meet certain conditions to be able to access the funds.
Volatility: The instability and unreliability inherent in the markets and the risks they generate. Volatility can also refer to statistical formulas used to measure the risks created by such conditions. Volatility is sometimes used to describe the level of risk in a particular stock or investment.
Waterfall Concept: A tax benefit created when a tax-deferred insurance policy is transferred to an heir. Waterfall concept can also refer to a policy designed to give a family such a benefit.
Whole Life Insurance: A life insurance policy that remains in effect as long as the beneficiary is alive and the premiums are paid. Whole life insurance policies usually require the full payment of the premium on a yearly basis.
Will: A legal document that outlines the administration of a deceased person's estate and the distribution of his or her assets. A will must usually be witnessed and sometimes notarized to be valid.
Wraparound Annuity: An annuity contract that allows a purchaser to control some of the funds invested in the plan. Wraparound annuities are only allowed in the US if they are the only method by which an investment can be purchased. A wraparound annuity that could be used to purchase most investments would be banned by IRS regulations.