Financial Literacy 2007 - Retirement
17 retirement savings terms to know

6. Individual Retirement Account (IRA) -- IRAs are retirement accounts with tax advantages. You may contribute up to the limit for each taxable year. Or, if you're age 50 or older, you can put aside more. But your contributions can't exceed your earned income. The investment grows tax-free until you begin making withdrawals, usually after age 59½. Take money out before then and you will usually get hit with a 10 percent penalty unless you meet certain specified requirements.

7. Life-cycle fund -- Also known as a target-date or target-retirement fund, it's a mutual fund that rebalances its investment mix based on proximity to a target date. As the date approaches, the fund automatically shifts its assets into a more conservative stance. This prevents investors from having to choose and manually shift their assets into more conservative funds as they near retirement age.

Read more about life-cycle funds in the Bankrate feature, " Target-date funds a solution."

8. Lifestyle fund -- A mutual fund that with an asset allocation mix that fits a risk and return profile chosen by the investor. Asset allocations are based on whether the fund has a conservative, moderate, balanced or aggressive investing approach.

9. Mutual fund -- An investment mix of stocks, bonds and other securities held by a group of investors. A professional portfolio manager uses the money pooled from the group to buy and sell securities based on the fund's objective. Investors buy shares in a mutual fund and share the losses and earnings from its performance.

For more information about mutual funds, read the Bankrate feature, " Top 10 mutual fund terms."

10. Required minimum distribution -- Generally, if you have a traditional IRA, you must begin taking money out of the account by April 1 of the year after you turn 70½. The amount is a minimum distribution determined by your age and life expectancy. The IRS has established simplified tables that a traditional IRA owner can use to determine the required distribution. If required payments are not made on time, the IRS will collect an excise tax. Roth IRAs aren't subject to minimum distribution requirements until after the Roth owner dies.

11. Rollover IRA -- This is the term used when transferring assets from one tax-deferred retirement plan to another. You'll want to do a direct transfer into an IRA rollover account. If you keep the money separate from your traditional IRA account you'll be able to move the IRA rollover account into your new employers' 401(k) plan after you've met their length of employment requirement.

If you accept a check, then the money in the account will be subject to mandatory withholding.

12. Roth 401(k) -- An employer-sponsored retirement plan that lets employees have the option of setting aside money from their paychecks that's taxed upfront and saving it in a retirement account where it can grow tax-free forever. Money can be withdrawn tax- and penalty-free as long as the participant is age 59½ and has held the account for at least five years.

To learn more about Roth 401(k)s, read the Bankrate feature, " Roth 401(k): a new way to grow money tax-free".

13. Roth IRA -- an individual retirement account in which withdrawals are tax-free if the account has been open for at least five years and you're at least 59½ when you start to withdraw money. Contributions to a Roth are not tax-deductible.

For help deciding between a traditional or Roth IRA read the Bankrate feature, " Traditional IRA or Roth IRA?"

14. Self-directed IRAs -- An IRA that is set up with a brokerage is said to be "self-directed." You have the responsibility of deciding how the money will be invested -- stocks, bonds, mutual funds, certificates of deposit and even real estate.

Beware: Custodian fees in a self-directed IRA will be considerably higher than those that the bank or broker charge, especially for real estate.

15. Simplified employee pension plan IRA (SEP-IRA) -- A retirement plan similar to an individual retirement arrangement for self-employed individuals and their employees. But where an individual establishes the IRA account, an SEP is set up by the employer.

SEP-IRAs are easy to establish and don't have the annual reporting requirements of other self-established retirement plans. Yet they can become financially problematic if more employees are hired, because the employer will be making the contributions on their behalf.
To weigh the pros and cons of a SEP-IRA, read the Bankrate feature, " Everything to know about retirement accounts."

16. Savings incentive match plan for employees IRA (SIMPLE IRA) -- A retirement plan that allows employees of small businesses with 100 or fewer employees and self-employed persons to make contributions to an IRA.

Like a 401(k), employees set up contributions to come out of their income before they receive their paychecks and enjoy an annual tax deduction. The money gets taxed as income when taken out of the account at retirement. As with a company-sponsored 401(k), employees are limited to the investment vehicles that come with the plan their employer selects.

17. Social Security -- America's government-run retirement supplement plan. Payroll taxes from employers and employees go to pay for the program.

For a complete list of retirement terms, check out our financial glossary.


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