Insurance Terms

An interim calculation used in computing income tax liability It is computed by subtracting certain allowable adjustments from gross income
Rule regarding eligibility to contribute to a Traditional IRA An individual must be under age 70 for the entire year to make a regular contribution to an IRA
An investment where the investor provides cash to the vendor typically an insurance company in exchange for the promise to pay a series of periodic usually monthly payments in return An immediate annuity begins to pay back right away other annuities might not pay back for many years The money invested in an annuity grows tax-deferred
The process of determining how investment funds will be apportioned among different asset classes such as stocks bonds and cash reserves Many financial advisers believe that the mix of asset classes has a greater impact on long-term portfolio results than does the performance of any individual investment
An automatic investment plan AIP allows for the easy execution of a dollar cost averaging strategy by enabling the investor to save a set amount over a specific time interval Examples You can set up an AIP with your custodian whereby you invest 50 every week in a specific mutual fund
A cash-balance plan is a pension plan in which a workers ultimate benefits are stated as a lump-sum cash amount instead of an annual payout Employers guarantee their workers a set annual contribution and a set percentage of gain in their retirement accounts for every year they are employed When employment ends workers can take a cash payout on the balance and roll it over into a traditional individual retirement account or they can take an annual annuity payout based on that final account value If the actual investments do better than the guaranteed gain the employer benefits If they do worse the employer eats the loss
Earning money on a principal investment and its interest usually calculated on a monthly or yearly basis Compounding is said to be one of the best ways to create wealth
A contingent beneficiary stands second-in-line to inherit assets such as a life insurance policy a retirement plan or an annuity Typically the owners of such assets will designate their spouse as a primary beneficiary But if both spouses die at the same time their children or trusts designated to act in their minor childrens names might stand as contingent beneficiariesAs with primary beneficiaries the assets of such accounts pass to contingent beneficiaries regardless of the dictates of a will and without passing through probate court That may be less expensive but it puts an added burden on account-holders to make sure their beneficiary arrangements are up to date at all times
Annual increases to Social Security benefits to offset the impact of inflation Also Known As Cost of Living Adjustment COLA
A type of account previously called the Education IRA created under the Taxpayer Relief Act of 1997 established exclusively for paying qualified education expenses of the designated beneficiary Contributions are non-deductible and earnings are tax-free for qualified withdrawals
The payment of IRA funds to a beneficiary upon the death of an IRA owner
Expense allowed by the Internal Revenue Service to be subtracted from an individuals gross income before figuring a persons taxable income Certain Traditional IRA contributions are classified as a tax deduction
A qualified plan designed to pay a benefit typically based on a percentage of salary at retirement The employer not the employee funds the plan
Defined benefit plans are more commonly known as traditional pension plans In a defined benefit plan an employer typically guarantees a worker a specific lifetime annual retirement income based on years of service final rate of pay age and other factors The risks of paying for the plan rest entirely with the employerMany defined benefit plans permit employees to convert their future income into a lump-sum payment at retirement Federal pension insurance generally protects retirees who opt for annual income but workers who opt for lump-sum payoffs are on their own to invest their sums wisely
A qualified retirement plan such as a 401k plan whose benefits depend on the amount contributed by the employeeemployer and the earnings of those contributions
A defined contribution plan is a retirement option that lets an employee -- and sometimes his or her employer -- contribute to their own tax-advantaged account In most plans including 401k SEP SIMPLE and traditional individual retirement accounts contributions and growth in the account are tax-free until the money is withdrawn In Roth IRAs and Roth 401ks contributions are taxed but all growth and withdrawals are tax-freeIn all defined contribution plans investment risks and the potential for gain are concentrated in the worker not in the employer Though some employers offer matching contributions to encourage workers to put their money in the ultimate decision to invest rests with the employee
Decreasing prices over time The deflation rate is usually measured per year In the United States deflation is historically rare The government does what it can to ensure widespread deflation does not occur as it would potentially lead to spending decreases since people would wait for things to become less expensive
The movement of funds from a qualified retirement plan into an IRA without the account owner taking receipt of the funds
Strategy for reducing the risk of investing in a single industrymarket sector or a small number of companies by spreading the risk over several industriesmarket sectors or a larger number of companies
A method of accumulating assets by investing a fixed amount of dollars in securities at set intervals regardless of stock market movements
A withdrawal of funds from an IRA a 401k plan or any tax qualified retirement plan usually before age 59 Early withdrawals are subject to tax penalties though there are some exceptions
A special additional tax of 10 due if one takes a distribution from their retirement plans such as a 401k or IRA prior to reaching age 59 or meeting some
Compensation received due to your physical or mental efforts and activity Includes wagessalary and net earnings from self-employment Does not include passive income such as interest dividends or capital gainsExamples You or your spouse must have earned income in order to contribute to a traditional or Roth IRA
Rule regarding eligibility to contribute to certain types of IRAs For a Traditional or Roth IRA an individual must have earned income to contribute Earned income includes but is not limited to wages salaries bonuses tips commissions and taxable alimony
See Coverdell Education Savings Account
An employers potential additional payment to an employees 401k plan contingent on the extent of an employees participation in the planExample A popular employer matching program is 50 of the first 6 This means that for every dollar an employee contributes to the 401k plan the employer adds 50 cents Once the employee reaches contributions equaling 6 of gross pay employer contributions cease until the following yearNote however that if the employee does not contribute at least 6 of salary to the 401k plan the worker forfeits additional compensation from the employerNot every 401k plan has an employer matching program
A Defined Contribution or Defined Benefit retirement plan The most common types are 401k Profit Sharing Plans and Pension Plans Other types include SEP Keogh and SIMPLE plans
Any IRA contribution that exceeds the maximum contribution limits permitted by law Penalty taxes apply for each year an excess contribution exists
The Federal Deposit Insurance Corporation is an independent agency created by the Congress to maintain stability and public confidence in the nations financial system by insuring deposits examining and supervising financial institutions for safety and soundness and consumer protection managing receiverships
The highest standard of responsibility on the part of an investment advisor An investment advisor has a fiduciary duty and is required to choose a path in the clients best interests regardless of compensation the advisor might or might not receive Compare to a suitability standard a lower standard of care placed on brokers
The IRS tax form on which early premature withdrawals are reported
The IRS tax form on which non-deductible IRA contributions are reported
Your home equity is the value of your home less all the debts you might have on the home Your debts would include your mortgage your home equity loan and your home equity line of credit When you retire your home equity can become an important financial asset especially if you are willing to sell your home and buy a less expensive place to live
A tax-deferred retirement plan that an individual with earned income can open Some individuals may deduct their IRA contributions from their taxable income
If youre employed you can take advantage of an Individual Retirement Account IRA That much is simple From there it gets a bit more complicated but well guide you on issues and opportunities such as tax-deferral potential tax deductions Roths IRA rollovers and conversions
Increasing prices over time The inflation rate is usually measured per year Small inflation rates can have a major impact on your purchasing power over many yearsExamples If the rate of inflation is currently 3 then a basket of goods which cost 100 this year will cost 103 next year
The risk that the purchasing power of your investment will be eroded by inflation Because more conservative investments generally provide the lowest returns over time they are generally more exposed to possible inflation risk
An investment portfolio is a collection of assets owned by an individual or by an institution An investors portfolio can include real estate and so-called hard assets such as gold bars But most investment portfolios particularly portfolios that are assembled to pay for a retirement are made up mainly of securities such as stocks bonds mutual funds money market funds and exchange traded fundsThe best retirement portfolios diversify the mix of investments -- which can range from the caution of US Treasury bonds to the risky zip of small-company stocks -- in an effort to dampen market losses and maximize potential gains
The transfer of money from another qualified retirement plan such as a 401k or regular IRA into another IRA The IRA receiving the money can be a new IRA or an existing one Done properly no withholding is taken out of the former account and no taxes are due the following April However any rollover will trigger a reportable item meaning you will have to indicate you did a rollover on your tax return
The movement of IRA funds directly from one IRA provider to another without the IRA owner taking receipt of the funds This transaction is sometimes referred to as a Trustee to Trustee transfer
One of several choices available to an annuitant for payment If the joint and survivor option is selected payments will continue past the owners death should hisher designated survivor beneficiary survive himher For example if a joint and survivor annuity is selected payments continue after the annuitant passes away if the designated survivor beneficiary is still alive Depending on the type of joint and survivor option available and selected the survivor payment may be the same or less as the payment made while both were alive Compare to Life Annuity and Term Certain
One of several choices available to an annuitant for payment If this life annuity option is selected payments continue for the length of the owners life However upon his or her death no payments are available to any survivor Consequently a life annuity typically has the highest monthly payout for amount invested Compare to joint and survivor and Term Certain options
A life cycle fund is a mutual fund which automatically reduces its risk over time to coincide with the age of the owner As the investor gets closer to retirement an appropriately selected life cycle fund will become more conservative selling stocks and purchasing more fixed income investments in recognition that a reduced risk profile is appropriate for someone nearing retirement Very similar to a target date fund
Life expectancy is the amount of time one is expected to live Shockingly one person can have multiple life expectancies The IRS has a life expectancy based on your current age Yet your doctor might have quite another based on your current health smoking habits stress level and genetics
Payment to a recipient of all funds accumulated in a 401k account or other tax-qualified plan within one taxable year
An employer contribution to an individuals 401k account based on the amount the individual contributes For example the employer may match 50 cents for every dollar the individual contributes
In a money purchase pension plan employers are required to contribute a fixed percentage of each eligible employees salary annually to each workers separate account The contributions are tax-deductible to the employer and tax-deferred for the employees Investments grow tax-free until money is withdrawn in retirementContributions for highly paid employees cant outweigh contributions for lower-paid employees by too much If complicated top-heavy tests show that they do contribution limits may be reduced for the highly paidThe Internal Revenue Service also can punish the company with excise taxes if it fails to fully fund its planMoney purchase plans were once commonly combined with profit-sharing plans which gave companies the benefit of high contribution limits and a degree of flexibility in determining the amount of each years contributions In recent years though contribution limits have risen significantly for much simpler types of plans removing most of the advantage from the money planprofit-sharing combination
A non-qualified retirement plan is one that does not qualify for special tax treatment under the Internal Revenue Code or the Employee Retirement Income Security Act In essence a non-qualified retirement plan is a contract to provide pension benefits Individuals can create one but most are created by employersContributors to non-qualified plans dont get the same tax benefits as contributors to qualified plans such as 401ks doBut because they are not constrained by the codes non-qualified plans can be much more flexible in setting benefit amounts and timing payouts Most are created to attract and retain highly paid employees
A primary beneficiary is a person or entity designated as the first in line to inherit an asset The owners of most retirement plans annuities and life insurance policies have the right to name primary beneficiaries They can choose people trusts or charitable institutions and they can name more than one primary beneficiary Account holders also can designate the percentage of assets that will go to each primary beneficiaryThe beneficiaries of such accounts inherit the assets immediately upon the account holders death without going through probate court and regardless of the dictates of the account holders willIn many types of retirement plans account holders need to secure their spouses written permission before they can name someone else as the primary beneficiary
Under a profit-sharing retirement plan employers can choose each year how much -- if anything -- they will contribute to their employees separate accounts which are tax-deferred Once a contribution amount is declared employers must follow whatever set formula is spelled out in their plan for distributing it Distributions commonly are weighted so that employees with higher pay get moreCare is in order though Profit-sharing plans are subject to top-heavy testing rules that allow the Internal Revenue Service to punish plans that grant too much participation to the highest-paid owners and employeesProfit-sharing plans were once commonly combined with money purchase plans which gave companies the benefit of high contribution limits and a degree of flexibility in determining the amount of each years contributions In recent years though contribution limits have risen significantly for much simpler types of plans removing most of the advantage from the money planprofit-sharing combination
A Defined Benefit or Defined Contribution retirement plan that receives special tax treatment because it meets the requirements of the Internal Revenue Code
A qualified retirement plan is one that is allowed certain tax advantages because it meets criteria spelled out in the Internal Revenue Code and in the Employee Retirement Income Security ActA qualified plan lets employers take tax deductions for any contributions they make to an employees account Employee contributions are tax deferred as is any investment growth until money is withdrawn Contribution limits apply to all plans as do penalties for early withdrawalSome of the most common qualified retirement plans include 401k profit sharing and 403b plans Some must be set up by employers Others such as a traditional individual retirement account or Roth IRA can be established by individuals
The reversal of a Roth IRA conversion or the redesignation of funds between plan types
The deadline by which an IRA owner must take his or her first Required Minimum Distribution The RBD is April 1 after the year in which the IRA owner turns age 70
A Congressionally-mandated distribution from a qualified retirement plan Starting with the April 1 after you reach 705 years old you must take annual distributions from your qualified retirement plans such as your 401k and IRA The amount you must distribute is based on the value of your accounts at the beginning of the year for which you are required to take a distribution That total is then divided by your life expectancy as determined by the IRSRoth IRA accounts are not subject to RMDs Also a 401k where you are still employed is exempt from RMDsFailure to take a RMD results in a 50 penalty
The minimum dollar amount an IRA owner must withdraw each year beginning when he or she reaches age 70 as required by the IRS
A tax-free movement of funds from one tax-qualified plan to another or to an IRA The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution
An IRA established to hold the assets of an eligible distribution from a qualified plan
A type of IRA established under the Taxpayer Relief Act of 1997 The Roth IRA is sometimes referred to as the back-ended IRA since contributions are not tax-deductible but the earnings may be withdrawn tax-free if IRS guidelines are met
The distribution of assets from a Traditional IRA into a Roth IRA
An IRA that allows the individual to select the investment options that best fit their investment objectives The investment choices include stocks bonds mutual funds and other funds and other investment vehicles Certificate of Deposits and other savings vehicles
An employer-sponsored retirement plan that is designed for owners of small businesses or self-employed individuals Contributions are tax-deductible and earnings tax-deferred Qualified individuals can contribute a fixed percentage of their earned net income up to 49000 maximum for 2011 SEPs are more flexible easier to set up and simpler to administer than many other qualified plans
A government-mandated program providing benefits for disability death and retirement to those who qualify All earnings are subject to Social Security tax Although benefits are related to the amount paid no personal Social Security accounts are created - unlike other retirement accounts Rather todays Social Security taxes go directly to todays program recipients with the excess funds used for alternative government spending
Spousal IRAs let stay-at-home spouses contribute the full amount allowed to an individual retirement account in any given year -- even if they earn no personal income -- as long as their husband or wife earns enough to cover their contribution Contributions can be made to either a traditional or to a Roth IRA subject to the usual income caps and contribution limitsOnce spousal IRA money is contributed it belongs to the non-wage-earning spouse regardless of where the money came from The wage-earning spouse need only earn enough income to cover the IRA contribution as well as any other retirement plan contributions the family makes in a given year
A type of distribution from an IRA that may begin without penalty prior to age 59 Substantially equal payments are calculated over the IRA owners life expectancy
The level to which a broker is typically held with respect to his conduct with his consumers Unlike an investment advisor a broker is not obligated to act in the best interests of his client and as such can freely choose investments with higher cost for the client but pay higher commissions for the broker Compare to a fiduciary duty a higher standard of care placed on investment advisors
A target benefit plan is a retirement plan that requires employers to make minimum contributions to each employees retirement account each year The risk of actual investment performance rests with the worker But employers are required to make contributions at a level designed to reach a certain payout goal -- the target -- for each employee based in part on the employers estimates of how the investments will perform and in part on the employees ageUnlike a money purchase plan older employees in a target plan will get larger contributions because they have less time to reach retirement And unlike a defined benefit plan the end result is not guaranteed
A target date fund is a mutual fund which will automatically reduce its risk as the investor reaches the target date typically his anticipated retirement date To do so a target date fund will sell stocks and purchase more fixed income investments over time in recognition that a reduced risk profile is appropriate for someone approaching retirement Very similar to life cycle fund
The postponement of taxes and sometimes the initial investment until the funds are distributed
An account where earnings such as interest dividends and capital gains are permanently excluded from taxable income A Roth IRA and a Roth 401k provide for tax-free growth as the earnings of a Roth account are never subject to income tax if the other Roth IRA requirements are met
One of several choices available to an annuitant for payment If the term certain option is selected payments will continue for the minimum of the amount of years of the term or the owners life For example if a 10 year term certain annuity is selected payments will continue for an additional four years if the annuitant passes away after six years Compare to Life Annuity and joint and survivor annuity
Original IRA designed to encourage individuals to save for retirement The three benefits of a Traditional IRA are tax deferral of interestearnings potential tax deferral of contributions and assurance for a more financially secure retirement
For a retirement savings plan participant vesting refers to the gradual granting of ownership of contributions made by your employer
The passing of certain time-based milestones ie per a vesting schedule whereby employer matching contributions to your retirement plan become permanently yours regardless of future employment