Glossary of Financial Planning Terms

 

  • 401(k) Plan - A qualified retirement plan established by employers which allows eligible employees to make salary-deferred (salary-reduction) contributions on a pre- or post-tax basis. Employers may make matching or partially-matching contributions to the plan on behalf of eligible employees; they may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis. (See also Employee Contribution Plan.)
  • Blackout Period - 1. A temporary period of time in which enrollment access to a company retirement or investment plan is limited or denied. 2. A period of time during which employees of a company with a retirement or investment plan cannot modify their plans.
  • Cafeteria Plan - An employee benefit plan which allows its members to choose from a variety of benefits to formulate a plan that best suits their individual needs; also known as a flexible benefit plan.
  • Coverdell Education Savings Account (ESA) - A tax-deferred account created by the U.S. government to assist families in funding higher-education expenses.
  • Distribution - A withdrawal of assets from a retirement account that are then paid to the account owner or beneficiary. The account owner (or beneficiary) may be required to pay income tax on distributions received during the year. Early-distribution penalties may also apply if the distribution occurs while the account owner is under the age of 59½.
  • Early Withdrawal - The removal of funds from a fixed-term investment before its maturity date, or the removal of funds from a tax-deferred investment account or retirement savings account before a prescribed time, such as the account owner's attainment of a minimum age requirement. An early withdrawal fee is usually imposed, which acts as a deterrent to frequent withdrawals before the end of the early withdrawal period.
  • Employee Contribution Plan - A company-sponsored retirement plan which allows employees to make salary-deferred deposits (contributions) into an account; some companies match those payments. (See also 401(k) Plan.)
  • Estate - The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death.
  • Heir - A person who inherits some or all of the estate of a recently deceased person. The legal successor is usually related to the deceased by a direct bloodline or has been designated in a will or by a legal authority.
  • Individual Retirement Account (IRA) - A retirement investing tool that can be either an "Individual Retirement Account" or an "Individual Retirement Annuity". There are several different types: Traditional IRAs, Roth IRAs, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs, and Simplified Employee Pension (SEP) IRAs. Traditional and Roth IRAs are established by individual taxpayers; Roth IRA contributions are not tax-deductible. SEPs and SIMPLEs are retirement plans established by employers, with individual participant's contributions being made to their own SEP- and SIMPLE IRAs.
  • Intestacy - The condition of dying without a legal will, upon which the government assumes responsibility and determines the method by which assets are to be distributed.
  • Keogh Plan - A defined-benefit plan or defined-contribution plan established by a self-employed individual for him- or herself and his or her employees.
  • Lump-Sum Distribution - A one-time payment for the entire amount due (or full distribution of funds made during the same tax year), rather than breaking payments into smaller installments; some lump-sum distributions receive special tax treatment.
  • Matching Contributions - A type of contribution that an employer chooses to make to his or her employee's employer-sponsored retirement plan, based on elective deferral contributions made by the employee.
  • Overcontribution - Any contribution to a tax-deductible retirement savings plan which exceeds the maximum allowed contribution for a given period of time as determined by the retirement plan's registrar; they are usually subject to some form of monetary penalty intended to reduce their occurrences.
  • Pension Fund - A fund established by an employer to facilitate and organize the investment of employees' retirement funds contributed by both the employer and employees. The fund is a common asset pool meant to generate stable growth over the long term, providing pensions for employees when they reach the end of their working years and begin retirement.
  • Pension Plan - A retirement plan (often tax exempt) into which an employer makes contributions for his or her employees. Many pension plans are being replaced by the 401(k).
  • Qualified Retirement Plan - Also known as a Qualified Plan, a plan which meets specific requirements set forth in the Internal Revenue Code and, as a result, is eligible to receive certain tax benefits.
  • Revocable Trust - A trust in which provisions can be altered or canceled by the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. This is the opposite of an Irrevocable Trust, which cannot be modified or terminated without the permission of the beneficiary.
  • Rollover - 1. The process of transferring the holdings of one retirement plan into another without suffering tax consequences. 2. The process of reinvesting funds from a mature security into a new issue of the same or similar security.

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