401(k) Plan
A retirement plan in which employees may make salary deferral contributions, and the contributions are excluded from their income for tax purposes. Contributions and earnings will compound tax-deferred. Withdrawals from the plan are taxed as ordinary income. If withdrawn prior to age 59½, the money may be subject to an additional 10 percent federal tax penalty.
403(b) Plan
A retirement plan for certain employees of public schools or non-profit organization. Employees may make salary deferral contributions, and the contributions are excluded from their income for tax purposes. Contributions and earnings will compound tax-deferred. Withdrawals from the plan are taxed as ordinary income. If withdrawn prior to age 59½, the money may be subject to an additional 10 percent federal tax penalty.
529 Plan
A tax-advantaged college saving plan, open to both adults and children, that is to be used to pay for tuition, room and board, mandatory fees, and required books and computers. As long as the money is used for these qualified college expenses, earnings are not subject to federal tax (often state tax as well).
Alternative Minimum Tax
An income tax imposed on individuals, corporations, estate, and trusts that ensure these entities that benefit from certain deductions, credits, and exclusions do not escape all federal income tax liability. Taxes must be calculated by both methods and the entity must pay the greater of the two.
Annuity
An insurance-based financial product sold by financial institutions that is designed to accept and grow funds and can provide future payments at regular intervals. Earnings are tax-deferred, so the owner will not pay tax on any earnings until withdrawal or receipt of periodic payments.
Beneficiary
A person or entity named in a will or financial contract as the inheritor of the property upon the death of the owner.
Bond
An investment in which an investor loans money to an entity, and the entity promises to pay the bondholders a specified amount of interest and to prepay the principal upon maturity. Bonds are typically issued in $1000 increments.
Capital Gain
Occurs when the difference between purchase price and the sale prices of a capital asset is positive.
Capital Loss
Occurs when the difference between purchase price and the sale prices of a capital asset is negative.
CFA (Chartered Financial Analyst)
Chartered Financial Analyst is a globally recognized designation from the CFA Institute earned by investment professionals that have passed a series of comprehensive security analysis examinations over at least a three-year period and has several years of industry experience.
CFP (Certified Financial Planner)
The Certified Financial Planner designation is a globally recognized professional certification earned by financial planners who have completed several years of industry experience, a rigorous course of study, and have passed a comprehensive exam on financial planning.
Custodian
A financial institution that has the legal responsibility of management and safekeeping of a client’s securities.
Deferred Compensation Plans
A plan that allows an employee to defer income, and subsequently the income taxes, so the funds can be withdrawn and taxed in the future.
Diversification
A risk management technique that invests in a wide variety of securities within a portfolio. Diversification attempts to limit overall risk, but does not guarantee against loss.
Dividend
A distribution of a portion of a company’s earnings to its shareholders. With preferred stock, dividends are usually fixed, but with common stock, dividends can vary.
Employer-Sponsored Retirement Plan
A tax-advantaged benefit plan that an employer offers to employees. Common retirement plans are 401(k) plans, 403(b) plans, profit-sharing plans, and simplified employee pension plans.
ETF
An ETF is a portfolio of stocks, bonds, or other securities, much like a mutual fund, but trades like a stock, with price changes throughout the day as they are bought and sold.
Fiduciary
A person or firm that has a duty and obligation to act in the best interest of their clients. A Registered Investment Adviser must put their clients’ investment needs above their own.
Gift Taxes
Currently, a gift over $13,000 from a donor to a recipient is subject to a federal gift tax. Gift tax is paid by the donor. Many states impose a gift tax as well.
Joint Annuity
Type of annuity that makes payments in whole or in part until both individual pass away.
Money Market Fund
An investment fund whose goal is to earn interest for shareholders while maintaining a net asset value of $1 per share. Portfolios are comprised of short-term, high-quality securities. However, these funds are not insured nor guaranteed by FDIC or any government agency, and it is possible to lose money.
Municipal Bond
A debt security issued by a municipality to finance its expenditures. Income from municipal bonds is usually exempt from federal and state income taxes. Some interest may be subject to federal alternative minimum tax. Selling a bond prior to maturity may result in a gain or a loss because the principal value of a bond fluctuates with market conditions. Capital gain taxes may be incurred if a municipal bond is sold at a profit.
Municipal Bond Fund
A mutual fund that focuses on investing in municipal bonds. These funds are exposed to inflation, interest rate, and credit risks associated with their underlying bonds. Bond prices typically fall when interest rates rise, which can affect a bond fund’s performance.
Mutual Fund
A professionally managed investment vehicle that pools money from investors to purchase a collection of stocks, bonds, and/or other securities. The fund is subject to the performance of its underlying securities.
Profit Sharing Plan
A plan that gives employees a percentage of those profits based on the company’s earnings.
Qualified Retirement Plan
A plan established by an employer for the benefit of the employees that meets the requirements of the IRS, and as a result is eligible to receive certain tax benefits.
Required Minimum Distribution
Minimum amounts that an owner of a Traditional, SEP, or SIMPLE IRA or qualified plan participants must begin withdrawing annually from their retirement accounts by April 1 after the year they reach age 70.5.
RIA (Registered Investment Adviser)
An RIA is an Investment Adviser who is registered with the Securities and Exchange Commission (SEC). RIAs exercise their fiduciary duty by providing guidance on investing in securities such as stocks, bonds, mutual funds, or exchange traded funds or other SEC-registered investments for their clients. They are generally paid a percentage of the value of the assets under management at the firm.
Rollover
The process of transferring the holdings of one retirement plan to another without suffering tax consequences. There are two types of rollovers, direct and 60-day. In a direct rollover, assets are transferred directly between one retirement account to another. In a 60-day rollover, the assets are made payable to the account holder, and must be deposited into the receiving retirement account within 60 days to avoid tax penalties.
Self-Employed Retirement Plans
There are several types of retirement plans that can be established by a self-employed individual. They include, but are not limited to, SEP IRAs, SIMPLE 401(k)’s, or self-employed 401(k)’s.
Simplified Employee Pension Plan (SEP)
A retirement plan that can be establish by an employer or self-employed individuals. An employer makes contributions to each eligible employee’s SEP IRA and are allowed a tax deduction for contributions made to the plan.
Single-Life Annuity
An annuity that only provides payments to one person. Payments cease when the annuitant dies, and there are no rights of payment to any survivor.
Tax-Deferred
Investment earnings that accumulate tax-free until they are withdrawn. This includes earnings from interest, dividends, and capital gains.
Tax-Exempt Bonds
The interest from bonds issued by states, cities, or other government agencies may exempt from federal income taxes under certain circumstances. The interest from these bonds may also be exempt from state and local income taxes in many states as well. Some interest may be subject to federal alternative minimum tax. Capital gains taxes may be incurred if a tax-exempt bond is sold at profit.
Taxable Income
The amount of income that is used to calculate income tax due. It is determined by subtracting any deductions, exemptions, or other adjustments from gross income.
Traditional Individual Retirement Account (IRA)
A plan that individuals may establish to save for retirement. If a taxpayer meets certain requirements, contributions are deductible from earned income in the calculation of federal and state income taxes. Earnings accumulate tax-deferred, and withdrawals are taxed as ordinary income. If a taxpayer’s income exceeds a specified amount, only nondeductible contributions may be made.
Zero-Coupon Bond
A bond that does not pay a periodic interest payment, but trades a deep discount. Profits are earned at maturity when the bond is redeemed for its full face value. Even though the investor does not receive any income payments, interest income is subject to ordinary income tax each year.
