17 retirement savings terms to know
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.
|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|
For more information, read the Bankrate feature, ” 401(k) fundamentals .” To find out how much you can earn in your
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.
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.