Don't let intimidating investment terms keep you from saving for retirement. Below, we defined some of the most common words you'll encounter while financing your golden years.
17 common retirement terms
|1.||401(k)||10.||Required minimum distribution|
|3.||Bank loan funds||12.||Roth 401(k)|
|4.||Defined benefit pension||13.||Roth IRA|
|5.||Defined contribution plan||14.||Self-directed IRAs|
|6.||Individual retirement account (IRA)||15.||SEP-IRA|
|7.||Life-cycle fund||16.||SIMPLE IRA|
|8.||Lifestyle fund||17.||Social Security|
1. 401(k) -- An employer-sponsored retirement-savings program through which employees can make regularly scheduled contributions. 401(k) contributions grow tax-deferred until withdrawn from the account at retirement. Deposited money is put into an investment vehicle, which can differ from one plan to another. These can range from certificates of deposit to stocks, bonds and mutual funds.
Because 401(k) contributions get taken out of your paycheck automatically before you receive it, contributing to a 401(k) lowers your taxable income, which means you'll pay less to the IRS.
For more information, read the Bankrate feature, " 401(k) fundamentals ." To find out how much you can earn in your 401(k), use the Bankrate calculator, " How much money can I save in my 401(k) plan? "
2. Annuity -- A regular periodic payment made by an insurance company to a policyholder for a specified period of time. While earnings are tax-deferred and can provide lifetime income, investors may find that fees can be steep and earnings are taxed as ordinary income even if it's a long-term capital gain.
To learn more about the pros and cons of annuities, read the Bankrate feature, " Annuities."
3. Bank loan funds -- Also known as floating rate funds. These funds can be a risky but rewarding alternative to more traditional fixed-income investments. Bank loan funds consist of loans made by banks or other financial institutions to companies and are often below investment grade. While they're not true fixed income -- you can lose money -- they can provide a return equal to or better than high-yield money market accounts. That is because the loans that comprise the funds are very short-term, giving lenders the opportunity to frequently raise the interest rate. This ability to keep pace with interest-rate changes also helps keep your principal more stable than the typical bond fund.
4. Defined benefit pension plan -- An employer-provided retirement plan that pays according to a formula, usually a combination of tenure and salary.
5. Defined contribution plan -- A tax-advantaged retirement plan in which workers contribute a percentage of their incomes to these accounts. The employee and/or employer can make contributions on a regular basis for as long as the plan is active. Not all companies match worker contributions, and some that do match do so with company stock rather than cash. The amount the employee ends up with in retirement depends on the contributions made and the return on those invested funds.
For the most part, workers use their own money to fund these plans and bear all investment risk.
Depending on the plan, the employee can make pre-tax or after-tax contributions. Participants in a 401(k) or SIMPLE IRA, for example, get to deduct contributions from their gross income, so they pay less to the IRS upfront. When the employee retires, the money is taxed upon withdrawal from the account. With a Roth 401(k), workers put money in after payroll taxes are withheld, meaning the account doesn't offer an immediate tax benefit. But when the money is withdrawn, it is tax-free.