Dictionary of financial terms
A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X Y Z |
— A —
401k plan:
an employer-sponsored plan that let employees contribute pre-tax dollars out of their paychecks toward a retirement investment that grows tax-deferred.
Accumulation Period:
the period during which assets grow.
Annual election:
in a cafeteria plan, the total anticipated contribution for a specified benefit in a specified plan year. Because the annual election often determines benefits, it can only be changed for certain qualifying events.
Annuity:
a contract, generally sold by an insurance company, designed to provide payments at designated periods in a person's life. Annuities are often tax-deferred.
There are two basic types of annuities:
- Fixed Annuity
a type of annuity that provides payment of a specific sum of money at a fixed rate of return for a fixed period of time.
- Variable Annuity
a type of annuity that allows for the investment of assets in various portfolios. The return on assets will fluctuate in value over time, reflecting the performance of the underlying investment portfolios chosen.
Annual rate of return:
the gain or loss in a fund's value from the last trading day of the previous year.
Asset allocation:
how contributions are divided into various investment options.
Assets:
the cash and other investments in a qualified retirement plan.
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— B —
Balanced Fund:
a type of fund that diversifies its portfolio by buying a combination of investments: common stocks, bonds, etc.
Beneficiary:
a person chosen by a participant to take ownership of the participant's assets if the participant dies.
Bond:
a bond represents money borrowed by the bond's issuer from the bond's purchaser. The bond is the issuer's promise to repay the debt on a specific date (or dates) at a specified rate of return.
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— C —
Cafeteria Plan (Section 125):
a benefit plan that lets employees choose from a variety of benefits ranging from medical, dental, or life insurance, to dependent care assistance, to vacation savings, and more. Many benefits offer tax advantages to employers and employees. (Also called a flexible benefit plan.)
Capital:
the amount originally invested, also known as the principal investment.
Capital appreciation:
an increase in the price of an investment.
Compound interest:
interest paid on both the principal invested and the interest previously earned.
Contribution:
money contributed to an annuity, cafeteria plan, or qualified retirement plan.
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— D —
Diversification:
spreading your risk by investing in several different categories of investments.
Distribution:
the payment of any investment income generated by a fund. You may only take a distribution on your 401k for the following reasons:
- Termination of employment, including retirement
- Attainment of age 70 ½ (required minimum distribution)
- Hardship withdrawal (Penalties apply. Proof of hardship required for approval.)
- Termination of plan
- Death
- Disability
Because contributions to a 401k plan are made with pre-tax dollars, distributions may be taxable. Additional penalties may also apply for taking an early withdrawal (before reaching the age of 59 ½). Penalties may be avoided by choosing a rollover to a qualified retirement plan or IRA instead of having the distribution made directly to you.
Dividend:
the portion of a company's earning (after tax and overhead is paid) paid by a company to its investors.
Dollar cost averaging:
a technique whereby an investor contributes regularly to an investment, regardless of changes in the market.
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— E —
Election:
investment preferences specified by the participant.
Eligibility:
the time at which an employee satisfies age and service requirements to participant in a retirement or cafeteria plan.
Equity:
see: Stock
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— F —
Fixed income investments:
investments that pay a stated rate of return on a fixed schedule.
Flexible benefit plan:
see Cafeteria plan
Flexible spending account(FSA):
a cafeteria plan benefit that provides coverage under which specified, incurred expenses may be reimbursed. The maximum amount of reimbursement is usually equal to a participant's contributions. The two most common types of FSAs are medical FSAs and dependent care FSAs.
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— G —
Group annuity:
an insurance contract issued by a financial institution to your qualified retirement plan under which you may choose from several different investment options and under which you may also have the option to purchase a fixed annuity upon retirement.
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— H —
Holding:
a general term for the underlying investments of the investment options under your plan's group annuity contract. Holdings may include stocks, bonds, and other types of investments. It may also include shares of an underlying mutual fund.
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— I —
Inflation:
the increase in the cost of living over time. Inflation has historically averaged about 3.25% per year since 1926.
Inflation risk:
the possibility that increases in the cost of living will reduce or eliminate the value of investment returns.
Individual Retirement Accounts (IRAs):
a tax-deferred personal savings and investment account that allows individuals to set aside money for retirement and, subject to specific conditions, for other financial goals.
There are three basic types of IRAs:
- Traditional IRA
Personal accounts of up to $3,000 per year that working people and their spouses can establish on a tax-deferred basis, for the purpose of saving and investing for retirement.
- Roth IRA
Roth IRAs allow up to $3,000 in contributions per year. Unlike the traditional IRA, however, Roth IRA contributions are not tax deductible, but earnings and distributions can be tax-free for specified purposes and subject to restrictions at the time of withdrawal.
- Rollover IRA
Rollover IRAs hold money transferred from another qualified plan. Assets held in a rollover account classified as a conduit IRA may be subsequently transferred into another 401k or similar plan.
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— J —
— K —
— L —
Liquidity:
the ease with which an asset can be converted into cash.
Loan/Participant Loan:
a method of borrowing against your 401k plan. You may request a loan from the plan of up to 50% of your vested balance. The interest paid on a loan is being repaid
to the participant's 401k account as earnings. All loan repayments are made by means of regular payroll deductions. Not all plans allow participant loans.
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— M —
Mutual fund:
a single investment that pools investors' money to purchase a number of different securities.
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— N —
— O —
— P —
Participant:
an employee (or former employee) who participates in an employer's qualified retirement plan, benefits plan, etc.
Pension Plan:
a fund that is established for the payment of retirement benefits.
Plan administrator:
the individual or company responsible for managing the day-to-day activities of a retirement or benefits plan.
Portfolio:
a collection of investments held by a fund or individual.
Prime interest rate
The Prime Rate is defined by The Wall Street Journal as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks."
View current Prime Interest Rate
Profit Sharing Plan:
an arrangement where an employer shares some of its profits with its employees, often through a 401k plan.
Prospectus:
A disclosure document required by the Securities and Exchange Commission that describes a variable annuity, mutual fund, or variable life insurance policy, etc. It explains fees, expenses, objectives, risks, investment options, and contract benefits, including transfer and withdrawal rights.
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— Q —
Qualified retirement plan:
a retirement plan that receives favorable tax treatment by meeting requirements of the Internal Revenue Code.
Qualifying event:
in cafeteria plans, a life-changing event such as marriage, divorce, death, change in employment status, etc. that allows a participant to change their elections. Qualifying events are defined by the IRS.
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— R —
Return:
the yield (gain or loss) of an investment.
Risk:
the measurable possibility of loss or less-than-expected returns. Generally, investment risk is classified by three categories: conservative, moderate and aggressive.
Rollover:
a transfer of assets, tax free, from one qualified retirement plan into another qualified retirement plan, IRA or similar investment vehicle.
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— S —
Securities:
a general term for the investments regulated by federal and state agencies. bonds, stocks, etc.
Stock:
a share of ownership in a corporation. When a mutual fund invests in a company's shares, it's buying a piece of the company. Also known as equity.
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— T —
Tax deferral:
paying taxes in the future for income earned in the current year.
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— U —
Unit value:
the value of a unit of a fund.
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— V —
Variable Annuity
A type of annuity that allows for the investment of assets in various portfolios, whose return will vary over time, depending on the value of the portfolio. Annuity payments are often made to the holder in the future, usually at retirement.
Vesting:
in a 401k plan, the point at which an employee is guaranteed the full value of contributions made by their employer on their behalf (i.e. employee match or profit sharing. Vesting may depend on years of service with the employer or other factors.
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— W —
— X Y Z —
Years of service:
years worked by an employee for one employer. May be counted as calendar years or in hours worked, depending on plan terms.
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