Annual Defined Contribution Limit: the maximum 401k contribution limit that applies to all employeeandemployer 401k contributions in a calendar year. This limit is the lesser of 100% of the employee's total pre-tax compensation or a fixed amount that can change annually. Annuity: a contract purchased from an insurance company. For the premium you pay, you receive certain fixed variable interest crediting options able to compound tax-deferred until withdrawn. When you are ready to receive income distributions, this vehicle offers a variety of guaranteed payout options, known as “annuitization”. Variable Annuity: comprised of professionally managed portfolios that vary in both investment objectives and representative holdings. If you are working with a qualified investment advisor, you may allocate your purchase payments across any number of these portfolios in whatever percentage you choose with regard to financial objectives and market risk. Many variable annuities also offer optional riders, guaranteeing minimum annual income for a specific number of years or even life. Immediate Annuity: purchased with a lump sum of money from an insurance company, for a guaranteed series of payouts over a specific period of time or life. The amount of the payout depends on factors such as; amount of money used to buy contract initially, interest rate at time of purchase, selected payout option and life expectancy. Income payouts will be taxed at ordinary income tax rates. Fixed Annuity: provides a guaranteed interest rate for a specific number of years, typically 1, 3, 5, 7 or 10, as well as a variety of annuitization payout options-including guaranteed income for life. Taxes on interest earnings are deferred until you begin withdrawals, then it is taxed as ordinary income. Fixed Index Annuity: combines tax deferral and the potential for interest based on positive changes of an external index without actual participation in the market. Designed to provide a combination of benefits as well as protection from the market. As long as you abide by the terms in your contract, your principal is protected against market loss and any credited interest is locked in at the end of each term period and cannot be taken away as a result of a future market downturn. Most fixed index annuities have components that determine how much interest can be credited in a given year, the most common are Participation Rate, Spread and Interest Cap Rate. See definitions below. Participation Rate: determines what percent of the index increase is used to calculate your indexed interest. Example: if the insurance company sets the participation rate at 80%, your fixed index annuity will be credited with interest based on 80% of any increase in the value of the external index. Spread: a percentage that is subtracted from any increase in the value of the index during the term period. Example: if the annuity has a 1% spread and the index increases 7%, the annuity would be credited 6%. Interest Rate Cap: some fixed index annuities set a maximum interest rate (or cap) that the contract can earn in a specific period. If the index exceeds the cap, the cap is used to calculate the credited interest. Automatic Contribution Arrangement: a feature in a plan whereby a covered employee's compensation is reduced by an amount specified in the plan and contributed to the plan on the employee's behalf unless the employee makes an affirmative election to have a different amount or no amount contributed to the plan. Asset: a resource that has economic value to its owner. Examples of an asset are cash, accounts receivable, inventory, real estate, and securities. Asset Allocation: dividing your investment portfolio among the major asset categories. Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. Baby Boomer: a term referring to someone born between 1946 and 1964. The baby boomer generation currently makes up nearly 20% of the American population. Beneficiary: a beneficiary is any person who gains an advantage and/or profits from something. In the financial world, a beneficiary typically refers to someone who is eligible to receive distributions from a trust, will, life insurance policy or qualified retirement plan (401k or IRA). Beta: a measure of a stock's risk relative to the market, usually the Standard & Poor's 500 index. The market's beta is always 1.0; a beta higher than 1.0 indicates that, on average, when the market rises, the stock will rise to a greater extent and when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that, on average, the stock will move to a lesser extent than the market. The higher the beta, the greater the risk. Bond: a certificate of debt issued by a company or the government. Bonds generally pay a specific rate of interest and pay back the original investment after a specified period of time. Contingent Beneficiary: a contingent beneficiary stands second-in-line, behind the primary beneficiary, to inherit the assets of a retirement plan. Diversification: the practice of spreading risk by investing in a number of securities that have different return patterns over time. When one investment is yielding a low or negative rate of return in a diversified portfolio, another investment may be enjoying positive or above-normal returns. Estate: all that person owns (assets) minus debt owned at the time of death. This is what a person's net worth is after reconciling all debt. Estate Planning: the process of preparing a plan for transferring property during your lifetime and after your death. This involves preparing a will. Fiduciary: an individual or a institution charged with the duty of acting for the benefit of another party as to matters coming within the scope of the relationship between them. For example, any person who exercises any discretionary authority or control over the management of a 401k retirement plan or its assets. A fiduciary is to act solely in the interest of plan participants and their beneficiaries. IRA: Individual Retirement Account Traditional IRA: an IRA that allows individuals to contribute pre-tax income to an account that grows tax-deferred. Your contributions will be deducted from your gross income and you will not pay taxes until you withdraw money. RothIRA: an IRA for which contributions are taxed but earnings are never taxed. Meaning you don't deduct the contributions from your taxable income, but all income earned is tax-free. When you retire, the money withdrawn will not be taxed.
SEP IRA: a tax-deferred retirement plan for small business owners and their employees. SEP stands for Simplified Employee Pension Plan. The amount of money that is set aside is a percent of your annual income. The maximum is determined by either a dollar amount or a percent of your income (whichever is greater).
SIMPLE IRA: a retirement plan that can be used by most small businesses with 100 or fewer employees. SIMPLE stands for “Savings Investment Match Plan for Employees”.
401(k): a defined contribution plan that is tax-deferred and funded by employees of profit-seeking businesses. Employees set aside pre-tax dollars through payroll deduction. Employer contributions are optional. The account is not taxed until the money is withdrawn. Employees can choose what investments they want based on their risks.
403(b): a defined contribution plan is a tax-deferred funded by employees of government and nonprofit organizations. Teachers, school staff, nurses, doctors and ministers are examples of people who qualify. Money is set aside through pre-taxed payroll deduction. These amounts are sometimes paid by employers, employees or shared by both. Very similar to 401K. Marginal Tax Rate: refers to the tax bracket into which a business's or individual's income falls. Market Risk: the volatility of a stock price relative to the overall market or index as indicated by beta. Market Volatility: a statistical measure of the dispersion of returns for a given security or market index. Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace.
Mutual Fund: an open-end investment company that buys back or redeems its shares at current net asset value. Most mutual funds continuously offer new shares to investors. Principal: the original amount of money invested or lent, as distinguished from profits or interest earned on that money. Pension Plan: a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement. Portfolio: a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their funds counterparts, including mutual, exchange-traded and closed funds. Qualified Plan: a private retirement plan that meets the rules and regulations of the Internal Revenue Service. Contributions to such a plan are generally tax-deductible; earnings on such contributions are always tax sheltered until withdrawal. Real Rate of Return: the annual percentage return realized on an investment, adjusted for changes in the price level due to inflation or deflation. Required Minimum Distribution (RMD): the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner. Retirement: the period of time when you are no longer working but are able to meet expenses through savings, investments, and other income including IRA's, social security, savings, and investments. Retirement Plan: the process of saving for retirement. This means determining retirement income goals and the actions and decisions required to meet these goals. Planning also includes determining sources of income, estimating expenses, implementing a savings program and managing assets. Return: consists of income plus capital gains (or losses) relative to investment. ReturnonEquity (ROE): a ratio calculated by dividing common stock equity (net worth) at the beginning of the accounting period into net income for the period after preferred stock dividends, but before common stock dividends. ROE tells common stockholders how effect their money is being employed. 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. Risk Return/Trade-off: the balance an investor must decide on between the desire for low risk and high returns, since low levels of uncertainty (low risk) are associated with low potential returns and high levels of uncertainty (high risk) are associated with high potential returns. Risk Tolerance: the extent to which an investor will accept risk in the pursuit of a financial reward. The greater an investor's tolerance, the more risk s/he will accept in order to reach their goal. Social Security (SS): a US federal program of social insurance and benefits, including retirement income, disability, Medicare, Medicaid, and death and survivor benefits. Based on the year someone was born, retirement benefits can begin as early as 62 and as late as 70. Standard and Poor’s 500 Index (S&P 5000): an index of 500 major U.S. corporations. It is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The index tracks industrial, transportation, financial, and utility stocks. The composition of the 500 stocks is flexible and the number of issues in each sector vary Tax-deferred: you won't pay taxes on principal or the earnings until the money is withdrawn. Withdrawal Sequence: the order in which you withdraw income from savings vehicles during retirement. Withdrawal sequence will vary per individual and will take into consideration taxes, returns and RMD’s.
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