Glossary
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The 401(k) plan is a workplace retirement plan. It allows workers to defer a certain portion of their wages into a retirement account, which they can then invest for the future. In return, workers get certain tax advantages both in the short term and the long term.
401(k) matching contributions are the additional contributions made by employers, on top of the contributions made by employees. These matches are made on a percentage basis, such as 25%, 50% or even 100% of the employee’s contribution amount, up to a limit of total employee compensation.
A 403(b) plan is a workplace retirement plan — typically offered by public schools and higher education institutions, churches, and charitable entities — designed to help employees save for retirement while receiving tax benefits.
A 401(k) loan allows you to borrow from the balance you’ve built up in your retirement account. Generally, if allowed by the plan, you may borrow up to 50% of your vested balance, for a maximum loan amount of $50,000.
A
An annuity is an insurance contract that provides a guaranteed stream of income for a specified period or for life, and are often used for retirement purposes. Investors invest in or purchase annuities with monthly premiums or lump-sum payments.
Annual percentage yield (APY) is a percentage value that represents the total amount of interest you earn on certain types of accounts during the year. This earned interest goes toward your account balance and helps your account grow faster.
B
A beneficiary is any person or organization designated to inherit assets when someone dies. Trusts, estates, wills, annuities, pensions, and life insurance policies all have beneficiaries. You will be asked to designate a beneficiary when opening a tax-advantaged retirement account like an IRA.
C
Catch-up contributions give people who are age 50 and over, or who turn 50 by the end of the calendar year, a chance to save more in their 401(k)s, IRAs and other retirement accounts. When a catch-up contribution is made, the total contribution will be larger than the standard contribution limit.
A conventional loan is any type of mortgage that is not insured by the federal government. Instead, private lenders, such as banks and credit unions, issue conventional loans to homebuyers. Conventional loans are the most popular type of mortgage option today.
D
Just like inflation, deflation is a story of supply and demand. But instead of prices for goods and services going up over time, they go down. Generally, this means purchasing power increases — people are able to buy more with the same amount of money.
Direct File is a new tax tool to file federal taxes directly with the IRS. The online offering is currently available as a pilot to a limited number of taxpayers and is available in both English and Spanish.
E
An exchange-traded fund (ETF) is a type of investment fund that holds a variety of underlying securities, including stocks, bonds, or alternative assets. It’s a way for investors to pool their money and each gain exposure to the assets within the fund rather than purchasing each asset individually.
The earned income tax credit (EITC) is a federal tax credit designed to provide financial assistance to low-to-moderate-income workers. The amount received by a taxpayer depends on filing status, number of children, and annual income.
F
Face value represents the value, in dollars, of a specific security, such as stocks and bonds, at the time it's issued. While the market rate for these assets may fluctuate based on various factors, such as supply and demand, the face value remains constant.
Financial liability is a sum of money that one party or entity owes another. Essentially, it’s a debt that is owed at some point in the future. While some level of financial liability is essential, if your liabilities significantly exceed your revenue, it could jeopardize your financial stability.
A fiduciary is an individual or organization that has a legal duty of loyalty and care to another person(/s). A fiduciary who manages money for another person is required to act with the utmost integrity, making decisions that are in that person’s best interests – or they can be held legally liable.
A financial planner is a professional dedicated to helping you manage your money. They can assess your income, expenses, assets, and liabilities to get a holistic view of your financial health. Once they have a full understanding of your needs, they help you establish clear financial goals.
G
The gift tax is a tax assessed on transfers of cash or property valued above a certain threshold, which is referred to as an exclusion. The gift tax is paid by the giver of the gift, and rates range from 18% to 40%, depending on the amount by which your gifts exceed the exemptions.
H
HENRY is an acronym for "high earner, not yet rich." It is used to describe someone who earns a high income, usually between $100,000 to $500,000, but has not saved or invested enough to be considered rich. HENRYs typically spend a large portion of their earnings on expenses and purchases.
I
Interest rate refers to the amount charged by a lender. When you borrow money from a bank or other lender, interest is the primary method by which the lender earns income. It's the amount you pay back on top of what you borrow and is calculated as a percentage of what you owe.
I Bonds, also known as Series I Savings Bonds, are a type of savings bond issued by the U.S. Department of the Treasury.
Tax brackets are the different ranges of income-assigned tax rates. In the United States, there are seven different tax brackets, with tax rates ranging from 10% to 37%.
L
Liquidity represents how fast you can convert an asset, such as stocks and bonds, into readily available cash. However, for an asset to be liquid, you must not only be able to quickly convert it into cash, but the asset must also maintain its basic market value throughout the conversion.
M
Mortgage closing costs are the fees that you must pay when purchasing a home. These fees cover administration costs for preparing mortgage documents, attorney fees, insurance premiums, taxes, and other expenses. Most homebuyers can expect to pay from 3% to 6% of the total loan amount in closing costs.
Mutual funds are a type of investment that pools money from numerous shareholders to invest in a variety of securities, such as stocks, bonds and money markets. These funds are an integral part of many investors’ wealth management strategies.
Market value is the agreed price of a good, service or another type of asset. It can also be used as a financial measure of the value of a company. When you can calculate market value, you have a tool to use to help guide investments, purchases and negotiations.
A money order is a paper document, similar to personal checks in that the person paying identifies who the money order is payable to and sets the dollar amount. Unlike checks, you must purchase money orders with cash upfront, rather than have the funds come out of your checking account.
N
A non-deductible IRA is not a type of retirement account. Instead, it refers to non-deductible contributions made to a traditional retirement account. This retirement savings strategy is for those whose income exceeds the limits to make deductible IRA contributions or to contribute to a Roth IRA.
P
PITI is an acronym for principal, interest, taxes and insurance. This combination is what makes up your annual homeownership expense. Calculating your PITI number will help you determine which house you can afford and enable your lender to see if you are a viable candidate for a mortgage loan.
A pension plan is a benefit plan established by either an employer or a union (or another employee organization) to help employees save for retirement. The plan, depending on the type offered, may either guarantee workers a certain income during retirement or help them defer income for retirement.
R
A recession is a period of significant decline in economic activity. Although the exact definition varies, many experts consider a recession to be two consecutive quarters of decline in gross domestic product (GDP). As such, the market may experience major plunges and volatility over several months.
A Roth IRA is a type of individual retirement account. When you have a Roth IRA, you contribute after-tax dollars — up to a certain limit every year. That money stays in your retirement investment account and can potentially earn investment returns as you work your way toward retirement.
Retained earnings are the money that a business holds onto after the process of shareholder distributions. Retained earnings are important because they can fuel business stability and growth. Without retained earnings, the business may not have the funds it needs to invest in the future.
RMDs are an annual amount retirees are required to withdraw from their tax-deferred accounts after reaching a certain age.
S
A stock warrant is a contract that gives someone the right to buy or sell a security at a certain price before a specific date. It’s a type of derivative, similar to an option, which is a financial contract that derives its value from an underlying asset.
A SEP IRA — short for simplified employee pension plan — is a tax-advantaged retirement plan designed for business owners. While it can be used by businesses of any size, it’s often used by small business owners and self-employed individuals.
Stagflation is an especially difficult economic environment created by the combination of several factors: slow economic growth, high inflation, and a high unemployment rate.
A SIMPLE IRA — short for Savings Incentive Match Plan for Employees IRA — is a retirement plan designed for small business owners and their employees to save for retirement.
A solo 401(k), also known as a one-participant 401(k) plan, is for a company with no employees. A solo 401(k) shares all the characteristics of any other 401(k) plan, but it only covers the business owner and their spouse.
T
Tax-loss harvesting is the investing technique of selling depreciated securities to offset gains within a given tax year. This investment strategy can help lower your overall tax bill since your tax is paid on the net amount. The cumulative tax savings can make a real difference in your life,
In finance terms, a liability is a debt. It's an amount you are legally or contractually obligated to pay to another person, business or entity. A tax liability is an amount you have to pay to federal, state and local governments.
A tax credit is a dollar-for-dollar amount taxpayers claim on their tax return to reduce the income tax they owe. The government typically creates credits to encourage certain behavior among citizens or to provide support for certain types of situations.
Taxes are the sum of money paid to the government to collectively fund spending towards public goods and services. Taxes are used to fund things like schools, roads, and various public programs, such as Social Security and Medicare.
V
A vesting period is the schedule over which you gain ownership of various benefits. Vesting is a process that rewards long-term employees with potential benefits such as more ownership of their employer-sponsored retirement funds or equity compensation. Common vesting periods are 3 to 5 years.
W
Wealth management is the process of reviewing and making decisions about your wealth so you can achieve your financial goals.
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