Newsletter: Subscribe to receive safe money retirement tips and updates.

In order to better understand safe money and other retirement income planning concepts and topics, a glossary of terms is included for easy reference. This terminology provides brief explanations of words and phrases associated with safe money and related financial tools and their proper usage.

 

The glossary of terms offers a way to define, list, and expand upon potentially unfamiliar or intricate words and concepts used throughout the website and other associated safe money materials. There are also many examples, tables, charts, and graphs provided that can help with gaining additional clarity.

A

Accrue Definition

Accrue refers to the accumulation of money over a period of time. For example, this growth could take place in one or more different ways, such as through interest and/or dividends. In an annuity, growth in the contract takes place tax-deferred. This means that there is no tax due on the gain until the time of withdrawal.

Accrual can also relate to the amount of debt that is owed. In this case, if there is interest being charged on a debt obligation, the amount to be repaid will go up, or accrue, over time.

Accumulation Value

As it pertains to an annuity, the accumulation value – which is also referred to as the account value – is the current value of the annuity. The accumulation value is equal to the contributions, plus any interest earned, minus rider fees and/or any withdrawals that are taken out.

Adjusted Gross Income

Adjusted gross income, or AGI, is defined as one’s gross income, minus any adjustments, such as taxes, contributions to an employer-sponsored retirement plan, and/or premium payments into an employer-provided health insurance plan.

Annual Reset

The term annual reset refers to a crediting method on a fixed indexed annuity. This type of annuity will credit a certain level of interest to the annuity’s owner. This level of credited interest may be indexed or linked to the performance of underlying equity markets. Annual reset, then, means that the level of the credited interest is based upon the difference in the value of an index over the course of a set time period, such as one year. 

 

Annuitant

An annuitant is the individual (or individuals) who receives the income payments from an annuity. He or she is the person whose life the annuity payments are measured on or determined by. The annuitant and the owner of the annuity may be the same person, but they do not have to be. (It is important to note that not all annuities are required to be converted to an income stream.)

Annuities

Annuities can provide many benefits – both before and after you retire. These financial vehicles represent a contract between you (or you and another individual, such as your spouse) and an insurance company in which you make either a lump sum payment or a series of payments and, in return, you receive regular income disbursements that begin right away or at some time in the future.

There are several different types of annuities available in the marketplace today. So, it is easier to match a particular annuity to your specific needs and objectives. For example, immediate annuities typically begin making income payments within one to six months after purchase. But deferred annuities have two “phases.” These are the accumulation period and the income – or disbursement – period.

Throughout an annuity’s accumulation phase, one or more contributions may be made into the contract. The funds that are in the annuity are allowed to grow on a tax-deferred basis, meaning that no tax is due on the gain until the time of withdrawal.

During the income, or annuitization, phase, the payments from the annuity can be received on a regular basis for a set period of time, such as 10 or 20 years, or for the annuitant’s (i.e., the income recipient’s) lifetime, regardless of how long that may be.

Many annuities offer the option of income payments for the lifetime of two people. Therefore, payouts will continue for a survivor after the first person passes away. (The amount may be reduced or stay the same.) Many couples use this income alternative so that both individuals can count on an income for life.

Annuities can also be categorized by how the return is generated. The primary annuity categories include:

  Fixed Annuities – Fixed annuities offer a set rate of return. They are primarily known for their safety and their guarantees, and because of that, fixed annuities can be a good option for retirees and/or those who are risk-averse. These annuities will also pay out a specific amount of income for a certain number of years, or even for the remainder of your lifetime.

  Fixed Indexed Annuities – Fixed indexed annuities are a type of fixed annuity. However, these annuities can provide the opportunity to generate a higher rate of return by tracking an underlying market index (or even more than one index), such as the S&P 500. If the index performs well in a given time period, a positive return is credited – usually up to a set maximum, or cap. If the index performs in the negative during a given period, though, no loss is incurred. Like regular fixed annuities, fixed indexed annuities can also pay out an income stream.

–  Variable Annuities – With a variable annuity, the return is based on the performance of an underlying portfolio of equities – typically mutual funds. While the upside on a variable annuity is not usually “capped,” neither is the downside. So, unlike fixed or fixed indexed annuities, variable annuities come with risk of loss.

 

Annuities may offer additional features, too, such as a death benefit, and/or penalty-free access to the funds – even during the surrender period – in the event that the annuitant becomes disabled, is diagnosed with a chronic or terminal illness, or requires long-term care for at least a minimum period of time (such as 90 days or more).

An annuity should always be considered a long-term financial commitment. So, it is important that you only contribute money into an annuity that you won’t need for emergencies in the future. 

 

Annuitization

Annuitization refers to the process of converting an annuity’s contract value into a series of income payments – either for a set period of time (such as 10 or 20 years), or for the income recipient’s (annuitant’s) lifetime, regardless of how long that may be.

Annuities are oftentimes used for retirement income purposes – in particular, fixed and fixed indexed annuities – because they have the ability to continue making income payments, regardless of what happens in the stock market. 

Annuity

An annuity is defined as a contract between you and an insurance company in which you can make either a lump sum contribution or a series of contributions over time. In return, you can receive regular disbursements that begin right away or at some time in the future.

There are several different types of annuities available, so you can more closely meet your specific objectives. For instance, immediate annuities typically begin making income payments within one to six months after purchase. Deferred annuities have two “phases” – accumulation and distribution.

Throughout the accumulation phase, one or more contributions may be made. The funds that are in the annuity are allowed to grow on a tax-deferred basis, meaning that no tax is due on the gain until the time of withdrawal.

During the income, or annuitization, phase, income can be received on a regular basis for a set period of time, such as 10 or 20 years, or for the annuitant’s (i.e., the income recipient’s) lifetime, regardless of how long that may be.

Annuities can also be categorized by how the return is generated. The primary annuity categories include:

–  Fixed Annuities – Fixed annuities offer a set rate of return. They are primarily known for their safety and their guarantees, and because of that, fixed annuities can be a good option for retirees and/or those who are risk-averse. These annuities will also pay out a specific amount of income for a certain number of years, or even for the remainder of your lifetime.

–  Fixed Indexed Annuities – Fixed indexed annuities are a type of fixed annuity. However, these annuities can provide the opportunity to generate a higher rate of return by tracking an underlying market index (or even more than one index), such as the S&P 500. If the index performs well in a given time period, a positive return is credited – usually up to a set maximum, or cap. If the index performs in the negative during a given period, though, no loss is incurred. Like regular fixed annuities, fixed indexed annuities can also pay out an income stream.

–  Variable Annuities – With a variable annuity, the return is based on the performance of an underlying portfolio of equities – typically mutual funds. While the upside on a variable annuity is not usually “capped,” neither is the downside. So, unlike fixed or fixed indexed annuities, variable annuities come with risk of loss.

Annuity Percentage Rate

Like many other financial vehicles, there are some annuities that offer a set rate of return (either ongoing, or for a pre-set period of time). The annuity percentage rate is the return that the annuity will grow by for a given time, such as a year. This rate is set by the insurance company that offers the annuity. 

Asset

An asset is a property or other item that is regarded as having value, which can be used for increasing one’s net worth and/or for generating income. Some assets can do both. For example, a deferred annuity builds tax-deferred growth in the account and can also pay out a future income stream for a set period of time – such as 10 or 20 years – or even for the remainder of that recipient’s lifetime (no matter how long that may be).

Asset

An asset is a resource that is owned by an individual or a company and that provides some type of economic value. Oftentimes, assets will increase in value over a period of time. Assets can include a wide range of items, such as:

  Stocks

–  Bonds

–  Mutual funds

–  Annuities (both the account value and the stream of income)

–  Real estate

–  Collectibles

–  Vehicles

–  Equipment

–  Personal property

Current assets are short-term resources that are held for one year or less. These can include cash and cash equivalents. The gain on short-term assets is taxed at an investor’s ordinary income tax rate.

Long-term assets are held for more than one year. The gain on a long-term asset is taxed at a rate that is typically lower than the investor’s ordinary income tax rate. Currently (in 2021), long-term capital gains are taxed at 0%, 15%, and 20%, based on the investor’s income and tax-filing status.

Asset Allocation

Asset allocation is a method of investment planning that aims to maximize the return for any given level of risk, or reduce the risk for any given level of return by allocating capital to different types of assets in suitable proportions.

It is based on observations showing that different asset classes have very different typical patterns of returns and price variations over long periods of time. This is an extension of the old adage, “Don’t put all your eggs in one basket,” which inevitably prompts the question, “Which basket should I put them in, and how many in each?”

Asset allocation is based on the Modern Portfolio Theory. In 1952, Harry Markowitz, regarded as the “father of modern portfolio theory,” developed the first mathematical model that illustrated how risk can be reduced through the diversification of investments that have varying patterns of return. 

B

Beneficiary

A beneficiary is an individual (or more than one individual) who gains an advantage and/or profits from something. For example, in the financial world, a beneficiary is typically someone who is eligible to receive the distributions made from a trust, will, or life insurance policy. Other financial vehicles like annuities can also oftentimes have one or more named beneficiaries.

The beneficiaries are either named specifically in an insurance policy, trust, or other financial vehicle, or alternatively, they could be part of a group, such as “all of the insured children.” It is important to regularly review insurance policies and other assets in order to ensure that the beneficiary designations are up to date – especially if the insured has had a major life change, such as marriage or divorce, the death of a spouse, or the birth/adoption of a child or grandchild.

Best Savings Account Interest Rates

The best savings account interest rates can be found online, as well as by shopping different physical banks and credit unions. Given the current (2021) low interest rate environment, even the best savings account interest rates are typically under 1%.

While a savings account will not return enough to keep pace with inflation, it can be a good place to store your emergency fund (which is ideally between three and six months of your living expenses). That way, your money will be more liquid and easier to access if it is needed quickly.

Bond Yield

A bond yield is the figure that shows the return generated on the bond. In its most basic sense, yield on bonds is determined by dividing the price of the bond by the coupon rate. It is important to note that if the price of a bond changes, the yield will also change. 

Bonds

Bonds are fixed-income financial vehicles that represent a loan made by an investor to a borrower – which, in this case, is typically a company or government. In return for “loaning” these funds (i.e., purchasing a bond), an investor is paid a fixed rate of interest (although variable or “floating” interest rates are also becoming more common now).

The maturity of a bond can be short-term or long-term. If an investor holds a bond to its maturity, the bond’s face value is returned. However, if a bond is sold prior to its maturity date, there is usually an early-withdrawal penalty.

The price of bonds typically moves inversely with interest rates in the economy. For instance, if interest rates go down, bond prices will usually go up, and vice versa. Some bonds are considered riskier than others.

For example, government bonds are generally considered to be high-quality and safe, while “high yield” bonds are riskier. In return for the protection of principal, higher-quality bonds will often pay a lower interest rate.

Many retirees use bonds as a component in their income strategy. This is because they can count on a steady and regular interest payment. However, if future interest rates are low, a bond that matures – and in turn, requires the investor to purchase a new bond – could actually cause the amount of income to fall.

With that in mind, many people are turning to annuities as a substitute for bonds. One of the biggest reasons for this is because fixed and fixed indexed annuities can pay out a set, known amount of income for either a preset period of time (like 10 or 20 years), or for the remainder of the recipient’s lifetime. This is the case, regardless of what happens in the stock market or with interest rates in the future.

 

Broker

In the financial sense, a broker is an individual who buys and sells assets for others. For example, a stockbroker arranges the purchase and sale of stock shares of publicly traded companies, as well as other types of investments like bonds and mutual funds. Typically, brokers must be properly licensed before they are allowed to conduct these types of transactions.

C

Cap Meaning

As it pertains to investments and annuities, a cap is the highest percentage gain that the insurance company will credit in any time period. For example, if a fixed indexed annuity has a cap rate of 5%, and the underlying index has a return of 8%, the account will be credited with 5%. (If, however, the underlying index returns a lower percentage, such as 3%, the account will only be credited with 3%.) 

Cap Rate

As it pertains to investments and annuities, the cap rate is the highest percentage gain that the insurance company will credit in any time period. For example, if a fixed indexed annuity has a cap rate of 5%, and the underlying index has a return of 8%, the account will be credited with 5%. (If, however, the underlying index returns a lower percentage, such as 3%, the account will only be credited with 3%.) 

Capital Gains

Capital gains are defined as a profit from the sale of a property or an investment. These profits are considered to be taxable. The appreciated assets can include shares of stock, land or other real estate, mutual funds, or even a business.

There are both short-term capital gains and long-term capital gains. A short-term capital gain is profit incurred on an asset that is held for less than one year. These gains are taxed at the individual’s ordinary income tax rate.

Long-term capital gains are the profits that are generated on assets held for longer than one year. These gains are taxed at different percentages than short-term capital gains. Depending on an investor’s income tax filing status, the rates are 0%, 15%, or 20%. 

Cash Flow

Cash flow is the net amount of cash and cash-equivalents that are transferred in and out of a business. If a company has positive cash flow, it means that it is adding to its cash reserves. Alternatively, a negative cash flow means that there is more going out for expenses than there is coming into the company.

There are different types of cash flow. These include:

–  Operating Cash Flow – Operating cash flow includes all of the cash that is generated by a business’s main activities (such as the products and/or services that the company offers for sale).  

–  Investing Cash Flow – Investing cash flow refers to the purchase(s) of capital assets and investments.  

–  Financing Cash Flow – Financing cash flow refers to all of the proceeds that are gained from a business issuing debt and equity, as well as payments that are made by the company.

–  Free Cash Flow – Free cash flow is a measure that is oftentimes used by financial analysts when assessing the profitability of a business. This can represent the cash that the business generates after it has accounted for cash outflow that is necessary to support its operation, as well as to maintain its capital assets.

A company’s cash flow statement reports all of the different forms of incoming and outgoing capital of a business.

Cash Surrender Value

Cash surrender value is a component of some life insurance policies and annuities. It refers to an amount of money that may be paid out to the policy owner if the contract is cancelled. In a permanent life insurance policy and deferred annuity, the cash surrender value grows on a tax-deferred basis. This means that there is no tax due on the growth unless or until the funds are accessed.

If the cash surrender value is withdrawn, the portion that is considered gain will be taxable. Depending on how long an individual has owned a permanent life insurance policy or annuity, there may also be a surrender charge incurred.

Today, many annuities and permanent life insurance policies allow penalty-free access to the cash surrender value in the event that the policy or contract owner is diagnosed with a terminal illness and/or needs to reside in a nursing home for at least a set amount of time (usually 90 or more days).

Certificate of Deposit (CD)

Certificates of Deposit, or CDs, can be purchased through banks and credit unions. CDs are referred to as time deposits because in return for an investor leaving a lump sum deposit for a set period of time, interest will be paid. (The interest rate on CDs is generally higher than rates on money markets and savings accounts.) The longer the term, the higher the interest.

There are a variety of CD durations, such as 3, 6, 12, or 18 months, or even full-year increments. The original principal is repaid to the investor at maturity. If the investor cashes out before a CD has matured, there will usually be an early-withdrawal penalty.

Although the interest rate on CDs is typically low, these financial vehicles are considered a safe place to keep money because they won’t lose value in a downward-moving stock market. Older investors and retirees will oftentimes have a portion of their portfolio invested in CDs.

Many retirees use certificates of deposit as a component of their overall income strategy. This is because they can count on a steady and regular interest payment. However, if future interest rates are low, a CD that matures – and in turn, requires the investor to purchase a new certificate of deposit – could actually cause the amount of income to fall.

With that in mind, many people are turning to annuities as a substitute for CDs. One of the biggest reasons for this is because fixed and fixed indexed annuities can pay out a set, known amount of income for either a preset period of time (like 10 or 20 years), or for the remainder of the recipient’s lifetime. This is the case, regardless of what happens in the stock market or with interest rates in the future.

 

Compound Interest

Compound interest refers to growth on savings or investments, as well as the interest on a loan, and it is based on both the initial principal and the accumulated interest from previous periods. This differs from simple interest, which takes into account the initial principal and interest rate, but not the prior periods of interest.

As an example, if an individual deposits $100 into a savings account, the difference between getting 5% simple interest and 5% compound interest would be as follows:

 

5% Simple Interest vs. 5% Compound Interest

With an Initial Deposit of $100 and Annual Compounding

After Year 5% Simple Interest 5% Compound Interest
1 $105 $105
5 $125 $127.63
10 $150 $162.89

 

It is important to note that the rate at which compound interest accrues is dependent on the frequency of the compounding. Also, the higher the number of compounding periods, the greater the compound interest will be.

 

Consumer Price Index

The Consumer Price Index, or CPI, is an index of the variation in prices that are paid by typical consumers for retail goods, and other items and services. The CPI measures the weighted average of prices of a “basket” of consumer goods and services, such as food, medical care, and transportation. The CPI is determined by taking the price changes for each of the items in the “basket” and then averaging them.

Cost of Living Adjustment (COLA)

For Social Security retirement income recipients, a cost of living adjustment (COLA) is an increase in benefits to help benefits keep pace with inflation (and in turn, the rising cost of goods and services that need to be purchased).

The Social Security Administration (SSA) measures inflation using the consumer price index, or CPI, for urban wage earners and clerical workers (which is notated as the CPI-W). Social Security began offering annual cost of living adjustments (COLAs) in 1975.

For benefit recipients in 2021, the COLA increase is 1.3%. It is important to note that even though Social Security may provide a cost of living adjustment each year, these benefit increases are not guaranteed. 

D

Debt to Equity Ratio

Debt to equity ratio, or D/E, is determined by taking a company’s total liabilities and dividing them by its shareholder equity. The D/E ratio is used for evaluating a company’s financial leverage. In other words, it helps to show how much of a company’s financing has been obtained through debt versus wholly owned funds.

Deduction

As it pertains to taxes, a deduction is an item that can lower an individual’s or a business’s tax liability by lowering their taxable income. Deductions are generally expenses that a taxpayer or company incurs during the course of a year that may be applied against or subtracted from their gross income.

In the United States, a standard deduction is given on federal taxes for many individuals. The dollar amount of this deduction can vary from one year to the next. It is based on the taxpayer’s filing characteristics (such as individual, married filing jointly, head of household, or married filing separately).

Each state has its own particular laws with regard to the standard deduction. However, in most states, taxpayers have the alternate option of itemizing their deductions. In this case, tax deductions are only taken for any amount that is above the standard deduction limit. 

Deferred Annuity

Deferred annuities have two “phases.” Throughout the accumulation phase, one or more contributions may be made. The funds that are in the annuity are allowed to grow on a tax-deferred basis, meaning that no tax is due on the gain until the time of withdrawal.

During the income, or annuitization, phase, income can be received on a regular basis for a set period of time, such as 10 or 20 years, or for the annuitant’s (i.e., the income recipient’s) lifetime, regardless of how long that may be.

Annuities can also be categorized by how the return is generated. The primary annuity categories include:

   Fixed Annuities – Fixed annuities offer a set rate of return. They are primarily known for their safety and their guarantees, and because of that, fixed annuities can be a good option for retirees and/or those who are risk-averse. These annuities will also pay out a specific amount of income for a certain number of years, or even for the remainder of your lifetime.

   Fixed Indexed Annuities – Fixed indexed annuities are a type of fixed annuity. However, these annuities can provide the opportunity to generate a higher rate of return by tracking an underlying market index (or even more than one index), such as the S&P 500. If the index performs well in a given time period, a positive return is credited – usually up to a set maximum, or cap. If the index performs in the negative during a given period, though, no loss is incurred. Like regular fixed annuities, fixed indexed annuities can also pay out an income stream.

   Variable Annuities – With a variable annuity, the return is based on the performance of an underlying portfolio of equities – typically mutual funds. While the upside on a variable annuity is not usually “capped,” neither is the downside. So, unlike fixed or fixed indexed annuities, variable annuities come with risk of loss.

Deficit

As it pertains to financial transactions, a deficit can occur when expenses exceed revenues. This can also happen in other situations, too, such as when assets are less than liabilities, and when imports exceed exports. Deficits can also be incurred if a company, individual, or government spends more money than it receives within a certain period of time, such as one year.

Defined Benefit Plan

A defined benefit plan is a retirement plan that is established and maintained by an employer to provide systematically for the payment of determinable benefits to employees over a period of years after retirement, and usually for his or her lifetime.

Retirement benefits under a defined benefit plan are measured by, and based upon, various factors, such as the number of years of service that were rendered and the amount of compensation that was earned.

The amount of benefits and the employer’s contributions do not depend on the employer’s profits. The employer bears the entire investment risk and it must cover any funding shortfall. Any plan that is not a defined contribution plan is a defined benefit plan.

Due in large part to the expense of paying out the benefits from a defined benefit plan, many employers are discontinuing these benefits, and instead they are “replacing” them with defined contribution plans, such as the 401(k).

With that in mind, in order to generate a known amount of income over a preset period of time – or even for the remainder of the recipient’s lifetime – many people are turning to fixed and/or fixed indexed annuities.

 

Defined Contribution Plan

Under ERISA (the Employment Retirement Income Security Act), a defined contribution plan is an employee retirement plan in which each employee has a separate account, funded by the employee’s contributions and the employer’s contributions (usually in a pre-set amount). The employee is entitled to receive the benefit generated by the individual account.

These accounts impose an annual maximum contribution by the employee/participant. In 2021, participants age 49 and under may contribute up to $19,500, and those who are age 50 and over may contribute an additional $6,500 in “catchup” contribution.

Unlike defined benefit plans, defined contribution plans do not automatically generate an income stream when an individual retires from the employer. Rather, retirees who have money from a defined contribution plan must convert the funds to a financial vehicle, such as an annuity, that will provide them with an ongoing income stream – either for a set period of time, like 10 or 20 years – or even for the rest of their lives (no matter how long that may be).

Deflation

In its most basic sense, deflation is a reduction in the general level of prices in an economy. This typically occurs when the inflation rate falls below 0%. While deflation can lead to an increase in purchasing power, it can also lead to a higher rate of unemployment. 

Direct Rollover

A direct rollover refers to the movement of retirement savings and/or investments from an employer-sponsored plan (such as a 401k) directly into another retirement plan like an IRA (Individual Retirement Account).

Direct rollovers differ from indirect rollovers in that the former entails the money being moved over to the new account directly, whereas with an indirect rollover, a check is provided by the employer (or former employer) to the plan participant, and then he or she deposits the money into the new account.

While the processes have some similarities, a direct rollover is not the same thing as a transfer. That is because transfers typically involve moving money from one IRA account directly into another IRA. But with a rollover, employer-sponsored retirement funds are moved. 

Dividend

A dividend is defined as a portion of a company’s earnings or profits that are distributed pro rata to its shareholders, usually in the form of cash or additional shares of stock. Even though many companies have paid dividends for decades (or longer), they are not guaranteed. 

Dividend Yield

Dividend yield refers to the annual dividend payments that are paid to the shareholders of a company’s stock. Knowing the dividend yield can help investors to get a better idea of what they can anticipate regarding income from the investment.

A dividend yield is determined by taking the dollar amount of the dividend and dividing it by the share price. The result is expressed as a percentage. As an example, if the price of XYZ Company stock is $40 per share, and the company pays a dividend of $2.00 to investors, then the dividend yield is 5%.

$2.00 / $40.00 = .05

It is important to note that the amount of a company’s dividend – or even the payment of a dividend at all – is not guaranteed.

Dow Jones Industrial

The Dow Jones Industrial Average – or the Dow, as it is also referred to – is a stock market index that measures the performance of 30 large publicly traded companies in the United States. The value of the Dow Jones Industrial Average (or DJIA) is the sum of the stock prices of the companies that is then divided by a set factor.

Even though the Dow Jones is a commonly followed index, some investors feel that it is not an adequate representation of the overall United States stock market – especially as compared to larger indices like the S&P 500. 

E

Equity

In the financial and accounting sense, equity is a representation of the value that is attributable to the owner(s) of an investment or a business. For instance, the amount of equity in a real property is the difference between the value of the asset minus any loan balance and/or other liabilities that are associated with it.

From a business perspective, the book value of equity is calculated as being the difference between assets and liabilities on the company’s balance sheet. Market value equity is determined by taking the current stock price multiplied by the number of shares that are owned by an investor or business owner. 

Estate

An estate is the economic value of all that a person or entity owns – including both real and personal property – for disposition and administration of his or her property at their death, incapacity, or total disability.

Estates can consist of a wide variety of assets, including cash, stocks, bonds, mutual funds, real estate, collectibles, and furnishings. Depending on the overall value of an estate, it is possible that the heirs of a deceased individual may have to pay estate tax before assets and/or property is transferred. (Although a surviving spouse can receive assets tax-free.) For the year 2021, the federal estate tax exemption is $11.7 million. Several U.S. states also levy a state estate tax. So it is important to plan ahead so that survivors don’t lose a significant portion of the estate to taxation. 

Expense Ratio

Most types of investments and investment accounts will have some costs associated with them. For instance, with a mutual fund, the expense ratio (or simply, ER) is a measure of the fund’s operating costs relative to its assets. It is important to understand the expense ratio on any financial vehicles you are considering because it can have an impact on the amount of its actual return.

Some of the common operating costs that are factored into the expense ratio include management expenses, advisor fees, taxes, legal expenses, and 12b-1 fees, which go towards the payment of distribution and marketing of the fund(s). 

F

FDIC Insurance

The Federal Deposit Insurance Corporation is a federal government agency that was put in place to protect bank depositors’ funds – and since this entity was established back in 1933, not one bank depositor has lost any of their insured funds.

There are several different types of funds that are protected by FDIC insurance, including:

   Savings

   Checking

   Money market deposit accounts

   CDs (Certificates of Deposit)

Funds are protected up to a maximum of $250,000 per depositor, per insured bank, for each type of account ownership category. It is important to note that there are other financial vehicles that are not covered by the FDIC. These include stocks and bonds, as well as mutual funds, annuities, and life insurance policies. 

Federal Interest Rate

The federal interest rate, which is also referred to as the federal funds rate, is the target interest rate that is set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight.

Fiduciary

A fiduciary is an individual or an institution that occupies a position of trust. Some examples of a fiduciary include an executor of an estate, an administrator, and/or a trustee.

Finance

In its most basic sense, finance means the management of money. This includes taking part in a number of activities, such as investing and saving, as well as protecting assets from risks like a stock market correction.

As one gets closer to retirement, creating and updating an income-generation strategy is also a key component of finance, as is coordinating different incoming cash flow sources, such as Social Security, an employer-sponsored pension plan, and/or annuities. 

Financial Advisor Near Me

Finding the right financial advisor can take some research. One technique is to search online for a “financial advisor near me.” But just because an advisor is in your vicinity doesn’t necessarily mean that he or she is the best option for you.

So, before you commit to a particular financial professional, there are some key questions to ask, such as:

–  How are you compensated? The advisor may charge a flat fee, receive a commission for products that are sold, or charge a percentage each year based on the value of the assets they “hold” in your portfolio.

–  Are you an independent advisor? If the advisor is independent, it means that they can typically pick and choose financial vehicles from a list of potential sources. This differs from a “captive” advisor, who can only offer the mutual funds, insurance policies, and other financial vehicles that are held on their own employer’s “shelves.”

–  How long have you worked in the financial planning or advisory industry? Newer financial advisors won’t typically have the experience that a seasoned professional could provide – especially if the new advisor worked in a completely different field in the past. Ideally, the advisor you choose will have experience in a wide range of different market and economic environments.

–  Which licenses do you hold? Advisors who offer investments, insurance, and other types of financial tools are usually required to hold specific licenses in order to do so. In addition, they will also typically be required to complete ongoing continuing education courses.

–  Have you earned any professional designations? If an advisor holds certain industry designations, it may signify that they specialize in a particular area of planning. For example, the RICP (Retirement Income Certified Professional) designation requires both education and experience criteria before awarding the RICP.

–  Have any complaints been levied against you in the past? Even if a financial advisor has experience and knowledge, it is possible that there have been disputes and complaints levied against him or her. (Consider, for instance, Bernie Madoff.) To find this type of information, you can use the BrokerCheck tool on the FINRA (Financial Industry Regulatory Authority) by going to: https://brokercheck.finra.org. Here you can find general information about advisors, as well as their employment history, which licenses they hold, and whether any complaints and/or regulatory actions have been taken against them.

–  Are you a fiduciary? An advisor who is a fiduciary must legally and ethically put the interest of their clients above their own – even if that means suggesting that the client use the services of another professional who may be better able to help them.

While your current financial advisor may be adept at helping you grow and protect your portfolio, they might not be well-versed in turning those assets into a reliable, long-term stream of retirement income. With that in mind, as you approach retirement, you may need to shift to a financial professional who specializes in the creation, coordination, and maximization of income.

Knowing that incoming cash will arrive on a regular basis – and for as long as you may need it – can allow you to focus on other important things, such as traveling and/or spending quality time with family and friends.

Financial Advisors

A financial advisor is someone who provides financial guidance and/or advice to investors and retirees regarding their short-term and long-term growth, safety, and income objectives. There are many different types of financial advisors. These can include investment brokers, insurance agents, wealth managers, and retirement-income planning specialists. 

Financial Statement

A financial statement is a written record that conveys the business activities and the financial performance of a company. There are three components associated with a financial statement. These include the balance sheet, the income statement, and the cash flow statement.

The balance sheet provides an overview of the assets and liabilities, as well as the stockholders’ equity at a single point in time. An income statement is focused on the revenue and expenses in a specific period of time. In this case, expenses are subtracted from income in order to determine the company’s net income for a certain time period.

Cash flow statements measure how well the business is able to generate cash for paying its debts, as well as its operating expenses. If a company is publicly traded, investors and financial analysts rely on the data from a financial statement to make decisions regarding whether or not the stock is a good buy.

Full Retirement Age

With regard to Social Security, your full retirement age (FRA) is the age at which you are eligible for your full amount of retirement income benefit. For many years, full retirement age was 65 for most all eligible Social Security retirement income recipients.

Today, however, your full retirement age is based on the year you were born. It can be anywhere between age 65 and age 67. In order to be eligible for these benefits, you must also have accumulated enough “work credits.”

Currently (in 2021), one work credit is equal to $1,470. You can earn a maximum of four work credits per year. You must have 40 total work credits to be eligible for Social Security retirement income benefits.

Social Security Full Retirement Age

Year of Birth Minimum Retirement Age for Full Benefits
1937 or Before 65
1938 65 + 2 months
1939 65 + 4 months
1940 65 + 6 months
1941 65 + 8 months
1942 65 + 10 months
1943 to 1954 66
1955 66 + 2 months
1956 66 + 4 months
1957 66 + 6 months
1958 66 + 8 months
1959 66 + 10 months
1960 or Later 67

Source: Social Security Administration

 

G

Gross Income

Gross income refers to the total amount of pay from an individual’s employer, before taxes and other deductions, such as employer-sponsored insurance premiums and/or pre-tax contributions to a retirement plan such as a 401(k) plan.

This differs from net income (or net pay), which represents the amount of “take-home” pay that an individual has after all of the taxes and other deductions have been taken out.  

 

Gross vs Net

With regard to income, there can be a big difference between gross vs. net. Gross income is the total amount that you have earned from your employer and/or clients, before any taxes, health insurance premiums, or other items have been deducted. Net income is the amount of pay that is left over after the deductions have been subtracted. Another name for net income is spendable income, or “take-home pay.”

Businesses also track gross vs. net income. In this case, gross income is the company’s revenue after the cost of goods sold, or COGS, has been deducted. The remaining income is the company’s net income, or profit.

 

Group Life Insurance

Group life insurance is a type of coverage that is offered by an employer, typically via an employee benefits package. This financial safety net may also be obtained through other groups or associations, as long as the entity has been formed for a reason other than just obtaining discounted life insurance.

In some cases, the employee/participant may not be required to pay any of the premium, and in others the employer or offering institution may split the cost of the premium payments. Many organizations require participants to be associated with the group for a minimum period of time before they are eligible for the group life insurance coverage.

The cost of group life insurance is usually less than it would be if an insured were to purchase an individual policy on himself or herself – even with the same amount of death benefit and other features.

Also, there is oftentimes no underwriting required with group life insurance. So, those who have pre-existing conditions could still obtain insurance protection. As with other life insurance coverage, one or more beneficiaries must be named. These individual(s) will receive the death benefit if the insured passes away while the coverage is in force.

In the case of group life insurance, there is just one single contract that extends to all of the participants, rather than having each insured person own their own policy. In some instances, group life insurance is portable. This means that the insured may continue to hold on to the coverage after they leave the employer or organization. In other cases, the insured is not able to keep the insurance.

With that in mind, it is important to make sure that there is enough life insurance in force to cover your specific needs if you will lose your group life insurance coverage. Because the death benefit on group life insurance is oftentimes quite low, it may still be necessary to purchase additional protection in order to cover the various financial needs of your survivors.

 

Group Term Life Insurance

Group term life insurance is a type of coverage that is typically offered by an employer – as part of an employee benefits package – or through an association or entity that has been formed for a reason other than obtaining discounted insurance protection.

Term life insurance provides pure death benefit protection, with no cash value. For this reason, the cost of term life is usually lower than permanent life insurance with the same amount of death benefit.

In some cases, the employee/participant may not be required to pay any of the group term life insurance premium, and in others the employer or offering institution may split the cost of the premium payments with the insured.

Many organizations require participants to be associated with the group for a minimum period of time – such as 60 or 90 days – before they are eligible for the group life insurance coverage. The cost of group life insurance is usually less than it would be if an insured were to purchase an individual term life insurance policy on himself or herself – even with the same amount of death benefit and other features.

Also, there is oftentimes no underwriting required with group term life insurance. So, even those employees or group participants who have pre-existing health conditions could still obtain the insurance protection.

As with other life insurance coverage, one or more beneficiaries must be named. These individual(s) will receive the death benefit if the insured passes away while the coverage is in force.

In the case of group term life insurance, there is just one single contract that extends to all of the insured persons/participants, rather than having each of the insured persons own their own individual policy.

In some instances, group life insurance is portable. This means that the insured may continue to hold on to the coverage after they leave the employer or organization. In other cases, the insured is not able to keep the insurance.

With that in mind, it is important to make sure that there is enough life insurance in force to cover your specific needs if you will lose your group life insurance coverage. These needs may include the payoff of debt, funding of a funeral and other final expenses, and/or income replacement for a surviving spouse.

In addition, because the death benefit on group term life insurance is oftentimes quite low, it may still be necessary for you to purchase additional protection in order to cover the various financial needs of your survivors.

 

Guaranteed Investment Contract (GIC)

A guaranteed investment contract, or GIC, is a provision that is imposed by an insurance company that will guarantee a certain rate of return in exchange for keeping a deposit for a preset period.

These are typically considered to be stable and conservative investments that also have shorter-term maturity periods. The value of a guaranteed investment contract can be impacted by both inflation and deflation.

Guaranteed Lifetime Withdrawal Benefit (GLWB)

The guaranteed lifetime withdrawal benefit, or GLWB, is a rider that can be attached to a variable annuity. With this rider, you can withdraw money from the annuity – either sporadically or on a regular recurring basis – during the annuity’s accumulation phase (i.e., before the contract is converted over to an income stream) without incurring a penalty.

A GLWB rider combines the best features of the guaranteed minimum withdrawal benefit and the guaranteed minimum income benefit in that it provides guaranteed income base growth and a fixed, known withdrawal percentage during payout – without converting (i.e., annuitizing) the annuity to an income stream.

There is typically an added fee for including the guaranteed lifetime withdrawal benefit to an annuity. Therefore, it is important to ensure that the additional premium that is required is worth the benefit that you will receive. 

H

HELOC (Home Equity Line of Credit)

The acronym HELOC stands for home equity line of credit. This type of loan uses the equity in a home – which is the difference between the value of the home and the remaining balance on the mortgage – as collateral.

Because of this collateral, the lender can be more assured of gaining something of value, even if the borrower does not repay the HELOC. Therefore, the interest rates on HELOCs are typically low.

Home equity lines of credit offer a “revolving” source of funds that can be accessed whenever needed. It is important to note, though, that the lender places a second lien on the home in order to secure the HELOC. There may also be closing costs required.  

High-Dividend Stocks

High-dividend stocks – also referred to as high-dividend-paying stocks – are attractive to those who are seeking regular income. Dividends are usually paid out on a quarterly basis. The value of a dividend payment is measured by the payment in relation to its stock share price, and it is expressed as a percentage.

As an example, the dividend amount divided by the stock price is the percentage of the dividend yield. So, if the company’s stock share price is currently $150 and the dividend it pays out is $5 per share, the dividend yield would be 3.33%.

$5 / $150 = 3.33%

Typically, large corporations in industries like utilities are more likely to pay dividends than small cap companies that need as much capital as possible to keep the entity in business and growing.

Home Equity Line of Credit

A home equity line of credit, or HELOC, is a type of loan that uses the equity in a home – which is the difference between the value of the home and the remaining balance on the mortgage – as collateral for the borrower/homeowner so that they can quickly and easily access cash.

Because of this collateral, the lender can be more assured of gaining something of value, even if the borrower does not repay the HELOC. Therefore, the interest rates on home equity lines of credit are typically lower than other loans – especially those that are unsecured by property or other assets.

Home equity lines of credit offer a “revolving” source of funds that can be accessed whenever needed. It is important to note, though, that the lender places a second lien on the home in order to secure the HELOC. There may also be closing costs required.  

HSA

A health savings account, or HSA, is a type of financial account that works in conjunction with a high-deductible health insurance plan. Individuals contribute to HSAs on a pre-tax basis for the purpose of using the funds to pay for qualified medical expenses.

The money inside of an HSA is allowed to grow tax-deferred. Likewise, the withdrawals from an HSA are not taxed, provided that they are used for qualified healthcare costs – which can include dental and vision care, as well as prescription medications.

I

Index Futures

Index futures are a type of futures contract whereby a trader may buy or sell a financial index and then have it be settled at a date in the future. Oftentimes, index futures are used for speculating on the price direction of a particular stock market index, such as the S&P 500. 

Index Participation Rate

Fixed indexed annuities, or FIAs, can allow you to generate a higher return than that of a regular fixed annuity, but without risk of loss in a market downturn. As a “tradeoff” for this safety, though, these annuities will oftentimes limit the upside potential, as well. One way that an FIA does so is by imposing an index participation rate.

This refers to the increase in the tracked index(es) by which the annuity contract will grow. As an example, if the participation rate is 80%, and the underlying index has a return of 10% for a given contract period (such as a year), then the annuity will receive an 8% return. This is because 80% of 10% is 8%.

 

Indexed Annuity

There are different types of fixed annuities. These include a regular fixed annuity and a fixed indexed annuity, or FIA. Because a fixed indexed annuity is actually a type of fixed annuity, it offers many of the same features, such as tax-deferred growth, principal protection, and the ability to secure a lifetime income stream.

But there are some additional components associated with fixed index annuities that can provide you with other enticing benefits, too. For example, the growth that takes place in this type of annuity is tied in large part to the performance of an underlying market index (or more than one index), such as the S&P 500.

If the index performs well during a given time period, the annuity is credited with a positive return – oftentimes up to a certain maximum, or “cap.” But, if the performance of the underlying market index is negative, the annuity will simply be credited with 0% for that time period.

So, in essence, fixed indexed annuities can offer a win-win-win scenario in that your funds may grow more than those that are in a regular fixed annuity, but there is no downside risk, regardless of what happens in the market – plus it can provide you with an income you can count on for life.

There are several interest-crediting methods that you may find with fixed indexed annuities. These options determine how the interest changes will be measured in the account. These will usually include a combination of:

–  Caps – The maximum amount of interest allowed to be credited in a given period of time.

–  Participation Rates – The percentage, or fraction, of interest that is credited for a certain time frame.

–  Spreads – The percentage that may be subtracted from the gain in the underlying index (or indexes). For instance, if the underlying index gained 10% in a given time period, and the annuity has a spread of 4%, then the gain credited to the account would be 6%. 

While all of these methods can limit the upside potential of the annuity, though, the “tradeoff” is that you won’t lose value if the index (or indexes) that are being tracked perform in the negative.

Fixed indexed annuities can offer a long list of benefits, including:

–  Market-linked growth

–  Protection of principal

–  Tax-deferred gains

–  Ongoing, reliable income – possibly even for life

In addition, these safe money alternatives may offer some added perks as well, such as a(n):

–  Death benefit. Many annuities offer a death benefit whereby, if the annuitant (i.e., the income recipient) dies before they have received back all of the contributions to the annuity, a named beneficiary will receive these funds.

–  Long-term care waiver. Fixed indexed annuities may also offer penalty-free withdrawal(s) if the annuitant is required to reside in a nursing home (usually this stay must be for 90 days or longer).

–  Terminal/chronic illness waiver. There may also be penalty-free access to funds – even during the annuity’s surrender period– if the annuitant is diagnosed with a chronic and/or terminal illness.

Indexed Universal Life Insurance

Indexed universal life insurance is very similar to regular universal life insurance. However, it offers its policyholders the ability to allocate their funds to different “segments” that represent underlying market indexes. (There is typically at least one fixed segment in each IUP policy, too.)

Overall, indexed universal life insurance combines life insurance protection with more accumulation potential in its cash value component. These policies offer essentially the same features as regular universal life insurance, such as premium flexibility. Yet, they also provide more growth potential – with less risk than variable universal life insurance products.

The policy’s cash value earns interest based in part on the upward movement of an underlying stock market index (or, in some cases, more than one index). It is important to note, however, that the policyholder’s cash is not invested directly into the stock market.

These policies also offer a guaranteed minimum rate of interest. So, the policyholder actually will earn a minimum, or a “floor,” below which his or her interest rate will not fall. This can provide them with protection of principal during market downturns.

In the crediting of interest, the index movement is measured over a specific index term. Then, the annual percentage change – if any – is calculated. The annual percentage change in the index is adjusted by the interest rate cap, participation rate, and/or annual spread.

The resulting interest rate is then credited to the contract values. If, however, the underlying market had a down year and the interest calculation is negative, the interest rate that is credited to the account will be zero. This means that although the account holder will not earn anything for the time period, he or she will also not lose anything either. This can be a positive thing given that others who are invested in the market may have lost substantial amounts of money.

The most common factors that determine and set limits on the amount of interest that is credited are the participation rate, cap rate, and spreads and asset fees. In addition, a segment is also created when excess money – after premiums and policy charges are taken out – is directed to a crediting strategy.

Each segment has a cap rate, which is an “upper limit,” or a maximum on an index-linked interest rate. These rates are typically reset at the beginning of each interest-crediting period. A minimum cap rate may be guaranteed – and these may also vary from state to state.

Likewise, each segment also includes a specified participation rate that determines the percentage of the change in the index that is used in calculating interest earnings. Individual segments may have different participation rates, and these can change annually.

The index spread is the difference between what an index earns and what the account is credited. Indexed interest for certain types of indexed annuities is actually determined by subtracting an insurance company’s declared percentage from any gain that the index achieves in a specified period of time. For example, if the spread is 4% and an index increases by 10%, then the contract is credited with 6% indexed interest.

 

Inflation

Inflation refers to the general increase in prices, and the corresponding loss in purchasing power. Due to inflation, it requires more money to purchase the same amount of goods and services. So, in order to maintain one’s lifestyle, income will typically have to increase over time.

 

Insurance

Insurance can provide financial protection against a whole host of risks. These can include theft or damage to one’s auto or home, as well as for some or all of the expense of a healthcare or long-term care need.

There is also “insurance” that can be put in place to ensure that income in retirement does not run out – regardless of how long it is needed. This “coverage” can be obtained through an annuity. This “income insurance” will pay out for a set amount of time, such as 10 or 20 years, or for the remainder of the annuitant’s lifetime – regardless of how long that may be.

 

Inverted Yield Curve

An inverted yield curve is representative of a situation where long-term debt instruments have lower yields than short-term debt instruments of the same credit quality. This is also often referred to as a negative yield curve.

For example, when the yield curve “inverts,” short-term interest rates become higher than long-term interest rates – which is the opposite of how these rates typically perform. Therefore, an inverted yield curve is typically a predictor of a coming economic recession.

 

Investment

An investment is an asset or item that is acquired with a goal of generating appreciation and/or income. For example, shares of stocks and/or growth mutual funds may be obtained for the purpose of increasing the value of a portfolio, whereas bonds or immediate annuities may be purchased for income generation in retirement.  

 

IRA Account

Many investors contribute to an Individual Retirement Account, or IRA. Like 401(k)s, there are both traditional and Roth IRAs. With a traditional IRA, contributions may go in pre-tax, depending on whether you and/or your spouse are covered by a retirement plan at work, as well as whether or not your income exceeds certain levels. There are annual maximum IRA contribution limits. (In 2021, these amounts are $6,000 for investors who are age 49 and younger, and $7,000 for those who are age 50 and older.)

The growth that takes place inside of a traditional IRA is tax-deferred. So, in most cases, traditional IRA withdrawals are 100% taxable (because neither the contributions nor the growth has been subject to tax yet).

Required minimum distributions must begin when a traditional IRA account holder is age 72. And, if withdrawals are made prior to turning age 59 ½, they can be subject to an additional 10% early-withdrawal penalty from the IRS.

Roth IRAs are funded with after-tax dollars. However, the growth that takes place inside of a Roth IRA, as well as the withdrawals that are made, are tax-free. There are no required minimum distribution rules with Roth IRAs, either, so the money may remain in the account indefinitely.

Roth IRA eligibility is subject to income limits. These limits are based on earnings, as well as on whether the investor files their annual tax return as a single individual, or as married filing jointly or separately.

IRA Contribution Limits

Each year, the IRS imposes IRA contribution limits. This pertains to how much an individual may contribute to an Individual Retirement Account. In 2021, the annual limit is $6,000 for investors who are age 49 and younger, and $7,000 for those who are 50 and over.

It is important to note that this annual maximum IRA contribution limit is not per account, but rather it is the total dollar amount that may be contributed into a Roth and/or traditional IRA for the year. 

IRA Rollover

IRAs (Individual Retirement Accounts) may be used for saving money for the future. Funds may be directly deposited into an IRA (up to the maximum annual contribution limit). It is also possible to “roll over” funds from another IRA and/or from an employer-sponsored retirement account, such as a 401(k).

With an IRA rollover, the funds can be directly transferred from one financial institution to another. That way, the investor does not have to take receipt of the funds (which could lead to taxation as a withdrawal if the money is not reinvested within a set time period).

For instance, an individual may withdraw, tax-free, all or part of the assets from one IRA, and reinvest them within 60 days in another IRA. A rollover of this type can occur only once in any one-year period. The one-year rule applies separately to each IRA that the individual owns. An individual must roll over into another IRA the same property he or she received from the old IRA.

It is important to note that traditional IRA funds can be rolled to another traditional IRA, and Roth IRA funds may be rolled directly to another Roth account – and neither of these transactions will be taxable. However, if traditional IRA funds are rolled into a Roth IRA, it will be considered a taxable event. 

IRA vs 401k

There are several ways that you can save for retirement. These strategies can include the use of both personal and employer-sponsored plans. Two primary plans that many people have are employer-sponsored 401(k)s and individual IRAs.

401(k) plans are oftentimes offered through employers as a way to help workers save for the future, as well as to attain some tax-related perks. In this case, traditional 401(k)s allow employees to contribute pre-tax money into the plan. This can help to reduce your annual income tax liability because the amount of your 401(k) contributions are not taxed until the time you withdraw them in the future.

Money in a 401(k) plan is also allowed to grow tax-deferred, meaning that none of the gain is taxable either – at least until these funds are withdrawn. This tax-favored treatment allows for compounding of growth, because you are essentially receiving a return on your contributions, as well as a return on previous gains, and a return on the money that otherwise would have been paid in tax.

Investors are allowed to contribute up to a maximum dollar amount each year to a 401(k). In 2020, the maximum contribution is $19,500 if you are age 49 and younger. Those who are age 50 and over may contribute an additional $6,500.

Once a traditional 401(k) holder reaches age 72, it is necessary to start withdrawing at least some money from the account each year, based on the required minimum distribution, or RMD, rules.

While most companies offer traditional 401(k)s, there are some that provide a Roth 401(k) option. With a Roth 401(k), contributions are not tax-deferred. So, the money that is contributed to this type of plan has already been subject to income tax.

However, the money that is inside of a Roth 401(k) can grow tax-free. In addition, the withdrawals that are made from a Roth 401(k) are also tax-free. This is the case, regardless of the then-current income tax rates. There are some other differences, too, between a traditional and a Roth 401(k). For example, there are no RMD requirements with a Roth 401(k) plan.

Many investors contribute to an Individual Retirement Account, or IRA. Like 401(k)s, there are both traditional and Roth IRAs. With a traditional IRA account, contributions may go in pre-tax, depending on whether you and/or your spouse are covered by a retirement plan at work, as well as whether or not your income exceeds certain levels.

The growth that takes place inside of a traditional IRA is tax-deferred. So, in most cases, traditional IRA withdrawals are 100% taxable (because neither the contributions nor the growth has been subject to tax yet).

Required minimum distributions must begin when a traditional IRA account holder is age 72. And, if withdrawals are made prior to turning age 59 ½, they can be subject to an additional 10% early withdrawal penalty from the IRS.

Roth IRAs are funded with after-tax dollars. However, the growth that takes place inside of a Roth IRA, as well as the withdrawals that are made, are tax-free. There are no required minimum distribution rules with Roth IRA accounts, either, so the money may remain in the account indefinitely.

Roth IRA eligibility is subject to income limits. These limits are based on earnings, as well as on whether the investor files their annual tax return as a single individual, or as married filing jointly or separately.

 

IRA vs. 401k

  Traditional 401(k) Roth 401(k) Traditional IRA Roth IRA
Contribution Limits

(in 2021)

$19,500 (if age 49 or under)

$6,500 catch-up if age 50 or older

$19,500 (if age 49 or under)

$6,500 catch-up if age 50 or older

$6,000 (if age 49 or under)

$1,000 catch-up if age 50 or older

$6,000 (if age 49 or under)

$1,000 catch-up if age 50 or older

Tax Treatment of Contributions Contributions are typically tax-deferred Contributions are made with after-tax dollars Contributions may be tax-deferred Contributions are made with after-tax dollars
Tax Treatment of Growth in the Account  

Tax-deferred

 

Tax-free

 

Tax-deferred

 

Tax-free

Tax Treatment of Withdrawals 100% taxed as ordinary income Tax-free 100% taxes as ordinary income Tax-free
Withdrawal Rules Required minimum distribution at age 72 No required minimum distribution at any age Required minimum distribution at age 72 No required minimum distribution at any age
Early Withdrawal Penalty 10% IRS early withdrawal penalty if under age 59 ½ Withdrawal of contributions can be made anytime (but earnings may be taxed) 10% IRS early withdrawal penalty if under age 59 ½ Withdrawal of contributions can be made anytime (but earnings may be taxed)

 

 

Irrevocable Trust

There are two fundamental types of trusts. These are testamentary and living trusts. A trust that is set up to be established and operated after a person’s death is known as a testamentary trust. A living trust – which is also known as “inter vivos” – is set up during a person’s lifetime.

Living trusts are termed either as revocable or irrevocable, according to the following definitions:

–  A revocable trust allows you to retain full control of all your assets in the trust, with complete freedom to change or revoke the terms and conditions of your trust at any time.

–  With a revocable trust, if the trust owner has any type of second thoughts about the trust provisions, the terms of the trust can be modified – or the trust can be changed or even revoked altogether.

–  In some cases, a revocable living trust may be used as a partial substitute for a will – although typically a will is still needed in order to cover up any of the assets that were not transferred into the trust.
–  An irrevocable trust does not give you full control of any assets held in it, and you are not allowed to make changes to this type of trust without the consent of the beneficiaries. The upside to an irrevocable trust, however, is that it is not subject to estate taxes. That is because, by placing assets into an irrevocable trust, it essentially removes ownership – and in turn, tax responsibility – from you/your estate, provided that a proper amount of time has elapsed.

IRS (Internal Revenue Service)

The IRS, or Internal Revenue Service, is a government agency of the United States. It is responsible for the collection of taxes (including individual employment taxes and employment taxes), as well as for the enforcement of tax laws.

In addition, the IRS also handles gift, excise, estate, and corporate taxes. The Internal Revenue Service (IRS) is operated under the authority of the U.S. Department of the Treasury, and it is headquartered in Washington, D.C. 

J

Joint Account

A joint account is a bank or brokerage account that is held by more than one person. Each of the account holders has the right to deposit and withdraw from the account. There are different types of joint accounts.

Jumbo CD

Many investors and retirees use certificates of deposit, or CDs, as a safe money alternative. One reason for this is because CDs provide a set rate of interest, and they do not lose value in a downward-moving stock market. One type of certificate of deposit is the jumbo CD.

A jumbo CD is a certificate of deposit that requires an investor to make a higher minimum deposit than they would with a regular CD (as well as with most savings, checking, and money market accounts).

This minimum deposit is usually at least $100,000. In return for this higher amount of contribution, the bank or investment firm will pay the investor a higher rate of interest on their money. Because jumbo CDs are insured for up to $250,000 by the FDIC (Federal Deposit Insurance Corporation), they are considered to be risk-free investments.

Jumbo CDs can typically be purchased at both banks and credit unions, as well as through investment and brokerage firms (both online and “brick and mortar” organizations). 

Junk Bond

A junk bond is a high-yield – but also a high-risk – security that is typically issued by a company that wants to quickly raise capital in order to finance a takeover. Junk bonds usually have low credit ratings (below investment grade) by one or more credit rating agencies.

Because of the chance that the issuer of junk bonds will default, these investments are considered to be higher risk. However, due to their higher rates, they could also generate a higher return for the investor.

For investors and retirees who are seeking regular income, junk bonds may not be the best route to take – especially if a set amount of incoming cash flow is required. In this case, a fixed or fixed indexed annuity may be a better alternative, as these financial vehicles can produce a known dollar amount of income for either a set time period (such as 10 or 20 years) or even for the remainder of the income recipient’s lifetime. 

L

Life Insurance

In its most basic sense, life insurance is a type of coverage that pays out a set amount of proceeds upon the death of the insured (provided that the policy is in force when the insured passes away). These benefit dollars are typically received income tax free to the beneficiary(ies).

There are many different types of life insurance available in the marketplace today. The two primary categories of life insurance are term and permanent. With term life insurance, there is a death benefit, but no cash value or investment build-up within the policy.

As its name implies, term life insurance remains in force for a set period of time, or “term,” such as 10 years, 20 years, or 30 years. Many insurance companies also offer one-year renewable term insurance.

When the coverage expires, the insured may have to re-qualify to keep the policy going. At that time, the premium will usually be higher, because it is based on the insured’s then-current age and health condition.

Because term life insurance is considered a basic, plain vanilla type of plan, the cost of this coverage usually starts out fairly low – particularly if the insured is young and in good health at the time of application.

Permanent life insurance offers both death benefit protection and a cash value or investment component. The funds that are in the cash value are allowed to grow on a tax-deferred basis. This means that there is no tax due on the gain unless or until it is withdrawn.

There are several different types of permanent life insurance. These include:

  Whole life insurance

  Universal life insurance

  Variable life insurance

  Variable universal life insurance

  Indexed universal life insurance

 

Whole life insurance is considered the simplest form of permanent life insurance coverage. This type of policy offers death benefit protection, as well as a cash value component. This cash grows tax-deferred at a rate that is set by the insurance company.

Although the premium on a whole life insurance policy is typically higher than that of a comparable term insurance policy, the amount is locked in and guaranteed not to increase with whole life insurance (whereas term life insurance premiums can rise significantly – especially if the insured has contracted an adverse health condition before he or she renews their term life coverage).

A whole life policy’s cash value can typically be accessed at any time by the policyholder through withdrawals or policy loans. Paying back the loan is optional. However, any portion of the loan that is not repaid at the time of the insured’s death will decrease the amount of death benefit that the policy’s beneficiary receives.

Universal life insurance is a type of permanent coverage that offers a death benefit, as well as a cash value component. This type of protection can be purchased with one single lump sum or, alternatively, with premiums that are paid over a period of time.

The funds in the cash value component of the policy are allowed to grow on a tax-deferred basis. This means that there is no tax due on the gain unless the money is withdrawn. However, cash may be accessed tax-free in the form of a policy loan.

This type of life insurance is considered to be more flexible than a comparable whole life insurance policy. One reason for this is because the owner of a universal life insurance plan may be able to change the timing and the amount of the premium. (If this is the case, though, the coverage and cash value could be affected.)

Variable life insurance is a type of permanent life insurance. As with other types of cash value life insurance coverage, variable life provides both a death benefit and a cash value component within the policy. The cash value is the “savings” component of permanent life insurance policies, where the policyholder can essentially build up cash in the policy.

But variable life insurance differs from other types of permanent life insurance, like whole life, when it comes to the investment options for the cash value portion. Rather than the insurance company choosing the investment type, fund allocations or rate of return for the cash, the policyholder can choose from a wide array of investments such as stocks, mutual funds, and other types of equities.

Because of the tax-deferred growth in a variable life insurance policy, there is potential for the policyholder’s funds to compound and increase exponentially, as no tax will be due on the gain unless or until the time of withdrawal. Unlike a whole life policy, though, variable life insurance policies do not guarantee a minimum cash value, as poor investment performance could potentially diminish the entire amount.

Variable universal life insurance, or VUL, is a type of permanent life insurance policy that offers a death benefit and a cash value, or investment, component. The funds that are in the cash component of the policy are able to grow tax-deferred. This means that no tax is due on the gain until the time of withdrawal.

The return on the cash component of a variable universal life insurance policy is based on the return of underlying investments, such as mutual funds. There is also usually a maximum cap and a minimum floor (which is oftentimes 0%) on the investment return. The policyholder’s funds are not invested directly, though, but rather are placed in the insurance company’s sub-accounts.

Similar to regular universal life insurance, the premium is flexible on a VUL policy. While there is an opportunity to generate large returns on the cash value of a VUL policy, there can also be risk of loss.

Indexed universal life insurance is very similar to regular universal life insurance. However, it offers its policyholders the ability to allocate their funds to different “segments” that represent underlying market indexes. (There is typically at least one fixed segment in each IUP policy, too.)

Overall, indexed universal life insurance combines life insurance protection with more accumulation potential in its cash value component. These policies offer essentially the same features as regular universal life insurance, such as premium flexibility. Yet, they also provide more growth potential – with less risk than variable universal life insurance products.

The policy’s cash value earns interest based in part on the upward movement of an underlying stock market index (or, in some cases, more than one index). It is important to note, however, that the policyholder’s cash is not invested directly into the stock market.

These policies also offer a guaranteed minimum rate of interest. So, the policyholder actually will earn a minimum, or a “floor,” below which his or her interest rate will not fall. This can provide them with protection of principal during market downturns.

In the crediting of interest, the index movement is measured over a specific index term. Then, the annual percentage change – if any – is calculated. The annual percentage change in the index is adjusted by the interest rate cap, participation rate, and/or annual spread.

The resulting interest rate is then credited to the contract values. If, however, the underlying market had a down year and the interest calculation is negative, the interest rate that is credited to the account will be zero. This means that although the account holder will not earn anything for the time period, he or she will also not lose anything either. This can be a positive thing, given that others who are invested in the market may have lost substantial amounts of money.

The most common factors that determine and set limits on the amount of interest that is credited are the participation rate, cap rate, and spreads and asset fees. In addition, a segment is also created when excess money – after premiums and policy charges are taken out – is directed to a crediting strategy.

Each segment has a cap rate, which is an “upper limit,” or a maximum on an index-linked interest rate. These rates are typically reset at the beginning of each interest crediting period. A minimum cap rate may be guaranteed – and these may also vary from state to state.

Likewise, each segment also includes a specified participation rate that determines the percentage of the change in the index that is used in calculating interest earnings. Individual segments may have different participation rates, and these can change annually.

The index spread is the difference between what an index earns and what the account is credited. Indexed interest for certain types of indexed annuities is actually determined by subtracting an insurance company’s declared percentage from any gain that the index achieves in a specified period of time. For example, if the spread is 4% and an index increases by 10%, then the contract is credited with 6% indexed interest.

 

Long-Term Capital Gains

Long-term capital gains (or long-term capital losses) occur when an investor sells an investment that was held for at least one year. There is a gain if the investment generated a profit. (Alternatively, short-term capital gains or losses are generated when an investment is sold during a holding period of less than 12 months.) The amount of tax that you pay on a capital gain can depend on how long you held the investment.

For example, short-term capital gains are taxed at the investor’s ordinary income tax rate. If there is a long-term capital gain, the growth will also be taxed, but these rates are typically lower than ordinary income tax rates. Depending on the investor’s income tax bracket, long-term capital gains tax is 0%, 15%, or 20%.

 

Long-Term Capital Gains Tax Rates (2021)

Single Tax Filers

Long-Term Capital Gains Tax Rate Income Amount
0% $0 to $40,400
15% $40,401 to $445,850
20% $445,851 or more

 

Married Filing Jointly

Long-Term Capital Gains Tax Rate Income Amount
0% $0 to $80,800
15% $80,801 to $501,600
20% $501,601 or more

 

Head of Household

Long-Term Capital Gains Tax Rate Income Amount
0% $0 to $54,100
15% $54,101 to $473,750
20% $473,751 or more

 

Married Filing Separately

Long-Term Capital Gains Tax Rate Income Amount
0% $0 to $40,400
15% $40,401 to $250,800
20% $250,801 or more

Source: Internal Revenue Service (IRS)

 

For tax purposes, you can use capital losses to offset your capital gains. As an example, if you have a $10,000 profit on a stock you sold, and you sold another stock that had a $4,000 loss, then your total taxable capital gains would be $6,000 ($10,000 minus $4,000 equals $6,000). The difference between your capital gains and your capital losses is referred to as the net capital gain.

If your capital losses exceed your capital gains, you are allowed to deduct the difference on your income tax return, up to $3,000 per year (or up to $1,500 if your taxes are filed as married filing separately). If your net capital loss is over the annual limit, you are allowed to “carry over” the excess into the next year and deduct it on that tax return.

 

M

Maximum 401(k) Contribution 2020

Each year, the IRS will dictate how much money may be contributed to qualified retirement accounts such as the 401(k). The maximum 401(k) contribution 2020 was $19,500 for participants who were age 49 and younger, and $26,000 for those who are age 50 and older. These figures are the same in 2021.

 

Medicaid

Medicaid is a joint federal and state government program that provides health coverage to millions of Americans – including elderly individuals, low-income adults, children, and pregnant women.

This program is administered by the individual states, although it is funded jointly by both state and federal government. Qualification factors can include one’s health, as well as the amount of assets owned and income earned.

Medicare

Medicare is the federal health insurance program for people who are age 65 or older, as well as certain younger people with qualifying disabilities, and those who have End-Stage Renal Disease (permanent kidney failure that requires dialysis or a kidney transplant).

There are different ways that Medicare benefits may be received. These can include:

–   Original Medicare, or

–   Medicare Advantage plan

Original Medicare consists of Part A for hospital coverage, and Part B for doctors’ services, as well as medical supplies and equipment. Medicare Parts A and B were the original two components of Medicare coverage. If you also want to include coverage for prescription drugs, you can purchase a separate Medicare Part D drug plan.

Unlike Parts A and B, Medicare Part D is not offered directly through Medicare, but rather via individual health insurance carriers. You can also help yourself to fill in the “gaps” in Medicare’s coverage – such as deductibles and copayments – by purchasing a Medicare Supplement insurance plan.

Because Original Medicare doesn’t cover services like vision and dental, many people opt to get their benefits through a Medicare Advantage plan (which is also referred to as Medicare Part C), rather than through Original Medicare.

Medicare Advantage plans are also sold through insurance companies, so the benefits that are offered, as well as the premium cost, can differ from one plan to another. Many Medicare Advantage plans will also automatically include prescription drug coverage. So, there is oftentimes no need to purchase a separate Part D plan if you have Medicare Advantage.  

N

Net Income

Net income is the amount of money that remains after taxes, retirement plan contributions, and other deductions have been taken out. This is also referred to as “take-home pay.” 

O

Options

Options are financial vehicles that are derivatives which are based on the value of an underlying security, such as stocks. For example, if an investor purchases an option contract, he or she will then have the right or the obligation to buy or sell – depending on the type of options contract that it is – the underlying asset.

With a call option, the investor may purchase the underlying asset at a stated price within a pre-set time frame. Put options allow the investor to sell the underlying asset, also within a specified time frame and at a stated price.

Options Trading

Options trading involves the purchase and sale of options contracts. These financial vehicles grant you the right – but not the obligation – to buy or sell an underlying asset (such as shares of stock) at a preset price on or before a certain date.

There are different types of options. For example, with a call option, you have the right to buy the asset, and with a put option, you have the right to sell the underlying asset. Depending on the particular contract, options trading can be risky.

P

Payroll Tax

Payroll tax refers to a percentage of income that is withheld by an employer, who in turn pays employees’ income taxes, based on various factors such as wages, salary, commissions, and/or tips. (The remaining amount of money that the employee receives is their net income.)

The payroll tax that is deducted is paid directly to the IRS (Internal Revenue Service). If there is an overage of taxes paid for a given year, the employee will typically receive an income tax refund after they have filed their annual tax return.

Personal finance

Personal finance refers to several aspects of monetary management. These can include:

   Budgeting

   Saving

   Investing

   Spending

   Protecting assets (with insurance or other strategies)

   Tax planning

   Retirement income planning

There are many “tools” that may be used in personal finance, such as:

   Checking and savings accounts

   Investments (stocks, bonds, CDs, mutual funds, etc.)

   Insurance (life, health, auto, homeowners, disability)

   Annuities (for tax-advantaged savings and future income)

   Social Security

   Medicare

   Employer-sponsored retirement plan(s)

Because everyone’s financial goals are different, certain financial vehicles are not right for everyone. Therefore, it is best to discuss your specific short-term and long-term financial objectives with a retirement and/or income-planning specialist.

Portfolio Risk Management

The risk management of a portfolio can help to reduce risk, while at the same time providing growth and/or income. As it relates to finance, risk management is the process of identifying and analyzing, as well as either accepting or mitigating, uncertainty regarding the assets that are in a portfolio.

There are many different risks that could occur, such as stock market volatility, low interest rates, and inflation, as well as potential health and long-term care costs, and even longevity (because a longer life means that investors and retirees will have to face such risks for a longer period of time). 

Principal

In the financial aspect, principal is the original sum of money that is either placed into an investment or borrowed through a loan. 

R

Rate of Return

Rate of return, or ROR, signifies the gain or loss of an investment over a specific period of time. This is expressed as a percentage of the initial cost of the investment. For example, if an investor initially contributes $1,000 and after one year the value of the investment is $1,100, then the rate of return for that year would be 10%. 

Required Minimum Distribution

An individual must start receiving distributions from a qualified plan by April 1st of the year following the year in which he or she turns age 72. This is referred to as the required minimum distribution, or RMD, rule.

Subsequent distributions must occur by each December 31st. The minimum distributions can be based on the life expectancy of the individual or the joint life expectancy of the individual and the plan’s beneficiary.

Residual Income

Residual income is the type of incoming cash flow that continues flowing in, even after a job has been completed. As an example, an author may spend a certain amount of time writing a book, but they can continue to receive ongoing income on the book’s future sales. Another type of residual income is the cash that flows in from tenants – either residential or commercial – who continue to pay rent every month to live or work in a property.

Retirement Income

Retirement income refers to the incoming cash that is generated from investments and other financial vehicles after an individual has retired from the world of employment. Retirees can generate retirement income from a number of different sources, such as:

  Social Security

  Employer-sponsored pension plan

  Interest and/or dividends from personal savings or investments

  Rental income

  Reverse mortgage

  Annuity

Some retirement income may be subject to income tax. So, it is important to know which sources of incoming cash flow will be taxed, as well as what the tax rate is, so that you can estimate the amount of net spendable income. In some cases, there may be a “gap” between this and outgoing expenses. If so, a retiree may have to go back to work, cut back on expenses, or both.

Retirement Planning

Retirement planning is a process that involves deciding on income goals for the future (based on anticipated expenses, as well as possible “extras” like travel, entertainment, and fun – as well as potential inflation), and then matching up the amount with expected incoming cash flow.

Some of the income sources in retirement may include Social Security, an employer-sponsored pension, and/or dividends and interest from personal savings and investments. Retirement planning also involves coordinating these income sources, as well as using various financial “tools” to help reach future income objectives.

Similar to an individual’s working years, various emergencies should also be planned for in retirement. These could include healthcare and/or long-term care expenses, as well as home and auto repairs.

Return on Investment

Return on investment, or ROI, is a performance measure that is used for evaluating the efficiency or profitability of an investment. It can also refer to the comparison of efficiency of a number of different investments.

Revenue

Revenue is defined as the income that is generated from normal business operation in a certain time period, such as a quarter or a year. This figure also takes into account discounts that are given to the buyer(s), as well as deductions for any items that were sold but that were returned (and in turn, issued a refund). Expenses are also deducted from revenue in order to determine its net income or profit.

Roth 401(k)

Similar to a regular, or traditional 401(k), a Roth 401(k) is a type of employer-sponsored retirement plan. These are funded with after-tax dollars and have annual maximum contribution limits in place. (In 2021, the annual maximum contribution limit for a Roth 401(k) is $19,500 for those who are age 49 and younger, or $26,000 for participants who are age 50 or older.)

While there are no income tax deductions for Roth 401(k) plan contributions, the money that is inside of a Roth 401(k) plan grows tax-free. Withdrawals can also be received tax-free, regardless of what the then-current income tax rates are. This can allow for more net dollars to be used for living expenses. 

Rule of 72

The Rule of 72 offers a quick and easy way to estimate approximately how long it would take an investment to double, based on its rate of return. As an example, if the rate of return on an investment is 7.2%, then it would take roughly 10 years to double. That is because 72 divided by 7.2 is 10.

 

72 / 7.2 = 10

 

Note that the Rule of 72 applies to compound interest rates (versus simple). This calculation can be used on investments, such as stocks and bonds, as well as other types of assets that increase exponentially. Similarly, this calculation is oftentimes used to show the effect on annual charges and fees on investments.

S

S and P Index

The S&P Index is a stock market index that measures the stock share performance of 500 large companies that are listed in the United States. It is one of the most commonly followed equity indices. This index is maintained by S&P Dow Jones Indices, a joint venture that is majority-owned by S&P Global. The components that are included in the S&P Index are selected by a committee.  

Index funds that track the S&P 500 have been recommended as investments by some of the top financial experts in the world, such as John C. Bogle and Warren Buffett – particularly for those who are looking for long-term growth and performance. 

Safe Money Advice and Strategies

Safe Money Advice and Strategies – Federal Employee and TSP Safe Money Strategies

Employees of the federal government may be eligible for retirement savings benefits. One option is the Thrift Savings Plan (TSP). You could attain tax-advantaged savings, as well as a reliable income stream in retirement, if you participate in the TSP.

Understanding how the TSP plan works and knowing about the funding alternatives that are offered can help you determine which of these financial “tools” could best help you meet your specific retirement income goals.

What is the Thrift Savings Plan, and How Does it Work?

The Thrift Savings Plan, or TSP, is a retirement saving and investment plan for federal employees and uniformed services, including the Ready Reserve. Congress established this plan in the Federal Employees’ Retirement System Act of 1986. The Thrift Savings Plan offers the same types of savings and tax benefits that many private companies offer to their employees.

The TSP is a defined contribution plan, meaning that the retirement income you generate from your account will depend on how much you and your agency put into the account and any earnings that are accumulated over time.

Employees can contribute funds into the TSP – up to a maximum allowable amount – each year. The TSP is automatically set up when an individual is initially hired. In addition to personal contributions that the employee/participant makes, agencies may also make an additional deposit and a matching contribution to the account.

Because the employee contribution to the TSP is deposited via payroll deduction, an employee/participant will need to make an election through his or her agency or service in order to do the following:

   Begin TSP contributions (if not automatically enrolled)

   Increase or decrease the amount of the contribution (if automatically enrolled)

   Change the dollar amount of employee contributions or tax treatment

   Stop the TSP contributions altogether

Two tax treatment options are offered through the TSP. These are traditional and Roth. With the traditional option, the contributions that the employee makes will be pre-tax. The earnings grow tax-deferred until the money is withdrawn in the future. With no annual tax on these earnings, the TSP account’s value can grow and compound exponentially over time.

Alternatively, if the Roth TSP option is chosen, funds will be contributed to the TSP on an after-tax basis. However, the money can accumulate tax-free. Likewise, withdrawals are also free of income taxation, regardless of the then-current income tax rates.

 

TSP Fund Options

Like any other type of investment portfolio, the funds you choose for your TSP account must be appropriately matched with your individual financial needs and goals – both for the short term and the long term.

With that in mind, it is essential to have a good understanding of what each of the funds has to offer, as well as the risk you could incur, and who may or may not be a good candidate for each of the investment alternatives.

 

TSP G Fund

The TSP’s G Fund is the most conservative of the TSP fund options. This fund consists of a non-marketable U.S. Treasury security that offers both principal and interest that the United States government guarantees. However, the tradeoff for this principal protection is a relatively low rate of return.

 

TSP F, C, S, and I Funds

The Federal Retirement Thrift Investment Board currently contracts with BlackRock Institutional Trust Company, N.A. to manage the F, C, S, and I Fund assets. The F and C Fund assets are held in separate accounts.

The F, C, S, and I Funds are index funds, and each of these funds is invested in order to replicate the risk and return characteristics of its appropriate benchmark index. Therefore, these four index funds’ performance will typically match the corresponding broad market indexes’ return.

Both the growth potential and the possible risks of these funds are determined by the underlying index that each of these TSP funds matches. Before choosing any of these funds for inclusion in one’s TSP account, it is critical to understand how the return is determined and the potential risks to the principal.

 

TSP L (Lifecycle Funds)

TSP participants may choose to invest in the L Funds, which are also referred to as Lifecycle Funds. These are funds that invest in a variety of the other core TSP funds, based on professionally determined asset allocations, as well as in accordance with your time frame until retirement.

 

Withdrawal Options with the Thrift Savings Plan

Two types of withdrawals can be made from the Thrift Savings Plan. These include:

   Partial TSP Withdrawal

   Full TSP Withdrawal

TSP participants may take a partial withdrawal – even if already receiving installment payments. In addition, part or all of the funds in a TSP account may be used to purchase an annuity through the OPM’s (Office of Personnel Management) outside vendor.

It is important to note that if a plan participant receives a TSP withdrawal payment before he or she has reached age 59 1/2, they may have to pay an IRS-imposed 10% early-withdrawal penalty on any taxable part of the distribution that is not transferred or rolled over.

This penalty tax is in addition to the regular income tax that may be owed. There may, however, be certain exceptions. For example, if an individual leaves federal service during or after the year he or she reaches age 55 – or the year they reach age 50, if they are a public safety employee – then the 10% penalty tax does not apply to any withdrawal that is made that year or later.

There are a myriad of tax-related rules that can pertain to distributions from the Thrift Savings Plan. For that reason, it can be beneficial to discuss various options with a financial professional or a CPA (Certified Public Accountant) before making a decision about any income or withdrawal option.

 

Traditional versus Roth TSP Options

The Thrift Savings Plan offers two tax treatment options for employee contributions and income in retirement. These are traditional and Roth. For instance, if a participant opts to make traditional contributions into his or her TSP account, they will defer paying income tax on the amount of the contribution. Likewise, the earnings that are generated in the traditional TSP account will be tax-deferred until the time of withdrawal.

When withdrawing money from a traditional TSP account, then, the entire amount of withdrawal will typically be subject to taxation. That is because none of this money has been taxed in the past.

If, however, a TSP plan participant makes Roth contributions, this money will be contributed on an after-tax basis (unless they are a member of the military and are making tax-exempt contributions from combat pay).

The funds that are in a Roth TSP plan are allowed to grow tax-free. Likewise, the withdrawals that are taken from this type of account at retirement are withdrawn tax-free. This, in turn, could allow more net income to use for paying everyday living expenses and other needs and wants in the future.

 

Traditional TSP versus Roth TSP

The Treatment of: Traditional TSP Roth TSP
Contributions Pre-tax After-tax
Paycheck Taxes are deferred, so less money is taken out of the participant’s paycheck. Taxes are paid upfront, so more money comes out of the participant’s paycheck.
Transfers In Transfers are allowed from eligible employer plans and traditional IRAs. Transfers are allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s.
Transfers Out Transfers are allowed to eligible employer plans, traditional IRAs, and Roth IRAs. Transfers are allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs.
Withdrawals Taxable when withdrawn. Tax-free earnings if five years have passed since January 1st of the year the participant made their first Roth contribution, and they are age 59 ½ or older, permanently disabled, or deceased.

Source: www.tsp.gov

 

As a TSP participant, you may make both traditional and Roth contributions if you choose to do so. In this case, you are allowed to contribute any amount or percentage that you choose, subject to Internal Revenue Code (IRC) limits.

For example, the Internal Revenue Code places limits on the dollar amount of contributions that can be made to the TSP each year. These maximum contribution limits can change on an annual basis. In 2021, the maximum annual contribution is $19,500 for participants who are age 49 and younger and $26,000 for those who are age 50 and older.

 

Benefits of Participating in the Thrift Savings Plan (TSP)

The Thrift Savings Plan’s purpose is to help participants save for retirement through voluntary employee contributions and employer matching contributions for eligible employees.

Several benefits can be gained by participating in the TSP. These include:

    Simplicity – Enrolling in the Thrift Savings Plan only takes a few minutes, and the benefits begin within a month after signing up. Once a participant has established a TSP account, there are no additional requirements. This is because the contributions, the matching contributions, and the portfolio rebalancing are all automatic. The choice of TSP funds also makes it easy to select options that match a participant’s risk tolerance, time horizon, and financial objectives.

    Low Costs – The charges and fees that are associated with investing in the TSP are quite low, especially when compared to commissions and fees that are incurred on individual investments and insurance products.

    Matching Contributions – In addition to the employee contribution, the agency or service may also make matching contributions, which can help to boost accumulation in the participant’s TSP account.

    Tax Advantages – Depending on the type of TSP tax treatment that is chosen – traditional or Roth – TSP contributions may be made on a pre-tax basis, or alternatively, withdrawals may be received tax-free. In either case, the gains that take place inside of the TSP account are either tax-free or tax-deferred and, in turn, can help the funds compound exponentially over time.

    Wide Spectrum of Investment Options – There is a wide selection of investment options to choose from in the Thrift Savings Plan. These range from conservative, safe alternatives to growth-oriented equity options. The variety of choices can help employees/participants best match their specific needs and goals.

The TSP can be particularly beneficial to workers in the federal pay scale’s mid and upper ranges. These individuals are not likely to achieve adequate retirement income – per the FERS’ replacement rate (Federal Employees Retirement System), basic annuity, and Social Security. Because the traditional funds that are contributed into the TSP can be deposited on a pre-tax basis, this can ultimately reduce a participant’s taxable income.

Likewise, there is also a considerable benefit for service members who invest in the Thrift Savings Plan while they are deployed. This is because the income paid to soldiers during this time is tax-exempt, while the contributions that are made into a traditional TSP are pre-tax.

In addition, the future distributions from the Thrift Savings Plan to these individuals will also be tax-free. So, the TSP can essentially mimic the Roth IRA, but with much higher contribution limits – which are some nice benefits that non-service members cannot match.

 

Do You Still Have Questions About the TSP?

If you still have questions about the Thrift Savings Plan, or if you would like to determine how best to coordinate the TSP with your other retirement savings, it is recommended that you talk with a financial advisor who is well-versed in federal benefits.

Please feel free to reach out to us directly at [email protected] We look forward to helping you with your retirement savings and income-generating strategies.

Sample Standard Deviation

As it pertains to finance, standard deviation is a statistic that is used for measuring the dispersion of a data set relative to its mean. The standard deviation is calculated as the square root of the variance, starting with determining each of the data points’ deviation relative to the mean.

The standard deviation of a conservative blue chip stock is typically lower than that of a highly volatile stock. It is important to note that standard deviation calculates all uncertainty as being risky – even if it is in the investor’s favor. Therefore, it is important to consider other factors, too, when deciding whether or not an investment is right for you.

Social Security

Social Security can help retirees, as well as those who become disabled and/or widowed, from suffering financial hardship. This program provides a number of benefits for those who qualify, including:

   Retirement income (for workers, spouses, and qualifying ex-spouses)

   Disability income

   Survivors’ benefits

If an individual who is eligible for Social Security passes away, a one-time payment of $255 may also be made to the person’s spouse (or to their minor children, in some cases).

In order to be eligible for Social Security retirement benefits, you must be at least age 62, and have worked in a covered job where you (and/or your spouse) paid taxes into the system. You must also have accumulated 40 “work credits.” In 2021, one work credit is equal to $1,470. You can accumulate up to four work credits per year.

Provided that you have met these criteria, you can start to receive your full Social Security retirement benefits when you have reached your FRA, or full retirement age. Your FRA is based on the year you were born.

 

Social Security Full Retirement Age

Year of Birth Minimum Retirement Age for Full Benefits
1937 or Before 65
1938 65 + 2 months
1939 65 + 4 months
1940 65 + 6 months
1941 65 + 8 months
1942 65 + 10 months
1943 to 1954 66
1955 66 + 2 months
1956 66 + 4 months
1957 66 + 6 months
1958 66 + 8 months
1959 66 + 10 months
1960 or Later 67

Source: Social Security Administration

 

Because Social Security only replaces a portion of your pre-retirement earnings, it can make sense to ensure that you have other income sources, as well, such as an annuity. These financial vehicles can pay you an ongoing cash flow for a preset period of time – such as 10 or 20 years – or even for the remainder of your lifetime, no matter how long that may be.

Social Security Benefits

There is a wide range of Social Security benefits that may be received, depending on your specific situation. These include retirement income (for workers, spouses, and qualifying ex-spouses), as well as disability income and survivor’s benefits. If an individual who is eligible for Social Security passes away, a one-time payment of $255 may also be made to the person’s spouse (or to their minor children, in some cases).

In order to be eligible for Social Security retirement benefits, you must be at least age 62, and have worked in a covered job where you (and/or your spouse) paid taxes into the system. You must also have accumulated 40 “work credits.” Currently (in 2021), one work credit is equal to $1,470 in income that you earn. You can accumulate up to four of these credits per year.

Provided that you have met these criteria, you can start to receive your full Social Security retirement benefits when you have reached your FRA, or full retirement age. Your FRA is based on the year you were born.

 

Social Security Full Retirement Age

Year of Birth Minimum Retirement Age for Full Benefits
1937 or Before 65
1938 65 + 2 months
1939 65 + 4 months
1940 65 + 6 months
1941 65 + 8 months
1942 65 + 10 months
1943 to 1954 66
1955 66 + 2 months
1956 66 + 4 months
1957 66 + 6 months
1958 66 + 8 months
1959 66 + 10 months
1960 or Later 67

Source: Social Security Administration

 

In some cases, it can make sense to begin collecting your Social Security retirement income as early as age 62. However, if you start these benefits prior to your full retirement age, the dollar amount will be reduced permanently.

Stock Dividends

A stock dividend is defined as a portion of a company’s earnings or profits that are distributed pro rata to its shareholders, usually in the form of cash or additional shares of stock. Even though many companies have paid dividends for decades (or longer), they are not guaranteed. 

T

Term Life Insurance

Term life insurance offers a death benefit with no cash or investment buildup in the policy. These policies remain in force for a specified period of time, such as five years, ten years, or even thirty years.

When the coverage expires, the insured may have to requalify to keep the policy going. At that time, the premium will usually be higher, because it is based on the insured’s then-current age and health condition.

Because term life insurance is considered a basic, plain vanilla type of plan, the cost of this coverage usually starts out fairly low – particularly if the insured is young and in good health at the time of application.

Thrift Savings Plan

The Thrift Savings Plan, or TSP, is a retirement savings and investment plan for federal employees and members of the uniformed services, including the Ready Reserve. This plan was established by Congress in the Federal Employees’ Retirement System Act of 1986. The FERS plan offers the same types of savings and tax benefits that many private companies offer to their employees, such as tax-deferred growth in the account.

The TSP is a defined contribution plan, meaning that there are maximum annual contribution levels, and that the retirement income that is generated from a participant’s account will be dependent on how much the employee – and their agency – puts into the account, as well as any earnings that are accumulated over time.

Eligible Federal employees can contribute funds into the TSP – up to a maximum allowable amount – each year. The TSP plan is automatically set up when an individual is initially hired. In addition to personal contributions that are made by the employee/participant, agencies may also make an additional deposit, as well as make a matching contribution.

V

Variable Annuity

With a variable annuity, the return in the account is based on the performance of an underlying portfolio of equities – typically mutual funds. While the upside on a variable annuity is not typically limited, or “capped,” neither is the potential downside. Therefore, unlike fixed or fixed indexed annuities, variable annuities can come with the risk of loss.

Variable annuities can also pay out an income stream. The dollar amount of these payments may fluctuate up and down, based on the movement of the market, and thus, the ups and downs of the investments that are being tracked.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance. As with other types of cash value life insurance coverage, variable life provides both a death benefit and a cash value component within the policy. The cash value is the “savings” component of permanent life insurance policies, where the policyholder can essentially build up cash in the policy.

But variable life insurance differs from other types of permanent life insurance, like whole life, when it comes to the investment options for the cash value portion. Rather than the insurance company choosing the investment type, fund allocations or rate of return for the cash, the policyholder can choose from a wide array of investments such as stocks, mutual funds, and other types of equities.

Because of the tax-deferred growth in a variable life insurance policy, there is potential for the policyholder’s funds to compound and increase exponentially, as no tax will be due on the gain unless or until the time of withdrawal. Unlike a whole life policy, though, variable life insurance policies do not guarantee a minimum cash value, as poor investment performance could potentially diminish the entire amount.

Variable Universal Life Insurance

Variable universal life insurance, or VUL, is a type of permanent life insurance policy that offers a death benefit and a cash value, or investment, component. The funds that are in the cash component of the policy are able to grow tax-deferred. This means that no tax is due on the gain until the time of withdrawal.

The return on the cash component of a variable universal life insurance policy is based on the return of underlying investments, such as mutual funds. There is also usually a maximum cap and a minimum floor (which is oftentimes 0%) on the investment return. The policyholder’s funds are not invested directly, though, but rather are placed in the insurance company’s sub-accounts.

Similar to regular universal life insurance, the premium is flexible on a VUL policy. While there is an opportunity to generate large returns on the cash value of a VUL policy, there can also be risk of loss. 

 

W

Wealth Management

Wealth management is a type of investment or financial advisory service that combines using the right tools to grow and protect assets of affluent investors. Rather than simply focusing on one type of financial vehicle (such as equities or insurance products), a wealth manager takes a much broader view of one’s objectives, and then creates a plan for getting there.

This type of planning is not a set-it-and-forget-it endeavor. Rather, after a plan has been created, it is regularly monitored and reviewed in order to make any adjustments that may be needed.

What is a Bond?

A bond is a type of fixed income financial vehicle that represents a loan made by an investor to a borrower – which is typically a government or a company – to raise money for various projects and other needs.

Bonds typically pay a set interest rate over a specified period of time (although there are also many bonds today that offer variable rates of interest). At the maturity date of a bond, the principal is paid back to the investor.

The price of bonds generally rises and falls inversely with interest rates. For example, if interest rates in the economy go up, the price of a bond will go down, and vice versa. Likewise, the demand for bonds will oftentimes have an inverse relationship with the stock market.

What is a Mutual Fund?

In their most basic sense, mutual funds are financial vehicles that are made up of “pools” of investor funds. Many investors can place their money into a single mutual fund. Each fund has a particular focus or objective, such as growth, aggressive growth, or income.

Mutual funds can consist of stocks, bonds, money market instruments, and/or a combination of many different assets. They are professionally managed, and their portfolios are structured and maintained with the purpose of matching the objectives that are stated in the fund’s prospectus.

Investors can purchase shares, or units, of the mutual fund – and each of the shareholders will participate proportionately in the mutual fund performance each market day. Unlike shares of stock, however, mutual fund shares are only priced at the end of each trading day, rather than on a constant basis throughout the day when the stock market is open.

There are many advantages to investing in mutual funds, one of which is that they provide the opportunity for small investors to invest in a well-diversified portfolio of funds without needing a great deal of capital in order to do so. But there could also be some risks involved – particularly with mutual funds that contain volatile stocks. 

What is a Pension?

A pension is a type of employer-sponsored financial plan that provides regular income payments eligible retirees of the company. True pensions require the sponsoring employer to make contributions into a “pool” of funds that are set aside for its employees’ future benefits. (There are also some pension plans that allow employees to voluntarily contribute to their future benefits, as well.)

Due in large part to the vast expense to the employer, many businesses have done away with defined benefit pensions and “replaced” them with defined contribution plans – the most popular of these is the 401(k) plan.

Therefore, in order to ensure an ongoing income stream in retirement, many people are turning to fixed and fixed indexed annuities. These financial vehicles can pay out a set amount of income – either for a pre-set period of time (such as 10 or 20 years), or for the remainder of the recipient’s lifetime, no matter how long that may be.

What is a Roth IRA?

With a Roth IRA, contributions go into the account after tax. However, the growth that takes place in the account, as well as the withdrawals, are tax-free. This is the case, regardless of what the then-current income tax rates are.

Similar to traditional IRAs, Roth IRA accounts impose maximum annual contributions. In 2021, this is $6,000 for investors who are age 49 and younger, and $7,000 for those who are age 50 and older.

Unlike a traditional IRA, though, Roth IRAs do not have required minimum distribution rules. So, the funds can remain in a Roth account without penalty – even after the investor has turned age 72.

There are some limits on who qualifies for a Roth IRA. For instance, in 2021, the Roth IRA income limit is $140,000 modified adjusted gross income for single tax filers, and $208,000 for joint income tax filers.

What is a Stock?

When you own a share of stock, you are a part owner in the underlying company. It is that ownership structure that gives a stock its value. There are many different kinds of stocks available on the market.

Typically, the price of a stock will track the earnings of the underlying company. Therefore, a good stock may go up even when the market overall is going down, and vice versa. Stock prices are also based on projections of future earnings of the company.

Over time, stocks have been considered solid investments in general. As the economy has grown over the years, so have corporate earnings, as well as stock prices. Although the average stock has returned approximately 10% over time, the term “over time” is relative. And, with the recent ups and downs of the stock market, returns on stocks have been very volatile.

In general, investors who are younger and have a longer time horizon and more risk tolerance should invest more heavily in stocks. However, good dividend-paying stocks can account for a portion of a retiree’s income portfolio. A smart portfolio that is positioned for long-term growth includes strong stocks from several different industries.

Over the short term, the behavior of the stock market is based on enthusiasm, fear, rumors, and news. But, over the long term, however, it is primarily company earnings that determine whether a stock’s price will go up, down, or sideways. Regardless of current market conditions, investing in stocks should be considered a long-term endeavor. And, in most cases, it is much smarter to buy and hold good, solid stocks than it is to engage in short-term trading.

What is an Annuity?

In the most basic sense, an annuity is defined as a contract between you and an insurance company in which you make either a lump sum payment or a series of payments and, in return, you receive regular disbursements that begin right away or at sometime in the future.

There are several different types of annuities. Immediate annuities typically begin making income payments within one to six months after purchase. Deferred annuities have two “phases.”

Throughout the accumulation phase, one or more contributions may be made. The funds that are in the annuity are allowed to grow on a tax-deferred basis, meaning that no tax is due on the gain until the time of withdrawal.

During the income, or annuitization, phase, income can be received on a regular basis for a set period of time, such as 10 or 20 years, or for the annuitant’s (i.e., the income recipient’s) lifetime, regardless of how long that may be.

Annuities can also be categorized by how the return is generated. The primary annuity categories include:

    Fixed Annuities – Fixed annuities offer a set rate of return. They are primarily known for their safety and their guarantees, and because of that, fixed annuities can be a good option for retirees and/or those who are risk averse. These annuities will also pay out a specific amount of income for a certain number of years, or even for the remainder of your lifetime.

–    Fixed Indexed Annuities – Fixed indexed annuities are a type of fixed annuity. However, these annuities can provide the opportunity to generate a higher rate of return by tracking an underlying market index (or even more than one index), such as the S&P 500. If the index performs well in a given time period, a positive return is credited – usually up to a set maximum, or cap. If the index performs in the negative during a given period, though, no loss is incurred. Like regular fixed annuities, fixed indexed annuities can also pay out an income stream.

–    Variable Annuities – With a variable annuity, the return is based on the performance of an underlying portfolio of equities – typically mutual funds. While the upside on a variable annuity is not usually “capped,” neither is the downside. So, unlike fixed or fixed indexed annuities, variable annuities come with risk of loss.

What is Dow Jones?

The Dow Jones Industrial Average – or more simply, the Dow – is a stock market index that measures the performance of 30 large, publicly traded companies in the United States. The value of the Dow Jones Industrial Average (or DJIA) is the sum of the stock prices of the companies that is then divided by a set factor.

Even though the Dow Jones is a commonly followed index, some investors feel that it is not an adequate representation of the overall United States stock market – especially as compared to larger indices like the S&P 500. 

What is FICA Tax?

The acronym FICA stands for the Federal Insurance Contributions Act. FICA tax is a type of federal payroll tax and it is deducted from the paychecks of W-2 workers and self-employed individuals. This tax goes towards earning work “credits” for future Social Security retirement income benefits. 

What is Sole Proprietorship?

Sole proprietorship is a type of business entity whereby there is just one single owner. As a sole proprietor, an individual pays personal income taxes on the profits that are earned through the business.

This is the easiest type of business to establish (as well as to take apart when the business owner retires or moves on to another endeavor). Sole proprietors can be at risk of being sued for an act of the business, by having personal assets at risk. 

Withdrawal

A withdrawal is the act of taking money out of a bank or brokerage account, as well as other types of financial vehicles like pension plans. In some cases, such as with CDs, life insurance, and annuities, there can be penalties if money is withdrawn before a certain date. 

Working Capital

Working capital refers to the funds used by a business in its day-to-day trading operations. It is determined by taking the company’s current assets and then subtracting its liabilities. Assets may include cash, accounts receivable, and inventory. Current liabilities are the company’s accounts payable. The amount of working capital is used for measuring its liquidity. 

Y

Yield

In the financial sense, yield refers to the earnings that are generated – and that are realized – on an investment over a certain period of time. Yield is expressed as a percentage, based on the invested amount, the current market value, or the face value of the security.

Yield also includes any interest and/or dividends that are received from holding the particular investment. Depending on the valuation (such as fixed versus fluctuating) of the investment, the yield may be classified as either known or as anticipated.

Yield Curve

The yield curve refers to the line that plots yields (i.e., interest rates) of bonds that have equal credit quality but different maturity dates. The slope of the yield curve can provide investors with an idea of where future interest rate changes and economic activity may go.

 

Yield to Maturity

Yield to maturity refers to the total return that is expected on a bond, provided that the bond is held until its predetermined maturity date. The yield to maturity, or YTM, is expressed as an annual rate. Other terms for yield to maturity include redemption yield and book yield.

Z

Zero-Coupon Bond

A zero-coupon bond is a type of bond that is issued at a deep discount to its face value, but that pays no interest. An example of a zero-coupon bond is a United States Treasury Bill. (Face value is the future value, or the maturity value, of the bond.)  

0-9

10-Year Treasury Rate (Yield)

The 10-Year Treasury note is considered a safe place to put money. These are debt obligations that are issued by the U.S. government. A 10-Year Treasury has a maturity of ten years (that begins at its initial issuance). These notes are designed to pay a fixed rate of interest every six months. Investors receive the face value of the 10-Year Treasury note upon its maturity.

Treasury rates (which are also referred to as yield) are the total amount of money that the investor earns by owning Treasury notes, bills, bonds, or inflation-protected securities. As with many other types of items and services, the yield on these investments will rise and fall, based on supply and demand.

While a 10-Year Treasury is considered safe, there can be interest rate risk associated with these investments. So, if this investment is being used for retirement income purposes, the amount could change – based on a higher or lower interest rate – in the future. In this case, a fixed or fixed indexed annuity could be a better alternative, because the dollar amount of income remains the same – regardless of how long it is needed.

1031 Exchange

Investors can “trade,” or exchange, assets by following the rules for either a 1035 or a 1031 exchange. With a 1035 exchange, various insurance policies may be exchanged – without having to pay tax on the investment gains that were generated, as long as the new policy insures the same person.

With a 1035 exchange, acceptable trades include a life insurance policy for another life insurance policy, an annuity for another annuity, and life insurance for a non-qualified annuity. There are also ways to exchange long-term care insurance and endowment policies.

A 1031 exchange refers to a section of the Internal Revenue Code (IRS Section 1031). In real estate, this is a swap of one investment property for another, which allows capital gains taxes to be deferred. These exchanges may only be done with “like kind” properties. If the 1031 exchange procedure is done properly, there is no limit on the number of these exchanges or the frequency with which they may be done by an investor.

It is important that the contract or policy owner not take receipt of the funds – even for the purpose of purchasing a new policy. Rather, in order for the transaction to defer taxes, the exchange must occur directly.

401(k)

A 401(k) plan is a tax-advantaged, defined contribution account that is offered by many employers to help their workers save for retirement. (The 401(k) is named after a section of the United States Internal Revenue Code.)

Many people “roll” the money from their 401(k) plan into an annuity when they retire. That way, they can count on a steady stream of income for either a set period of time – such as 10 or 20 years – or even for the remainder of their lifetime (regardless of how long that may be).

There are two types of 401(k) plans available. These are the traditional 401(k) and the Roth 401(k). With a traditional plan, the contributions into the account are typically pre-tax. This can allow the employee participant to have less taxable income (and in turn, lower income taxes) in the year(s) that they contribute.

The funds that are in a 401(k) are allowed to grow tax-deferred. This means that there is no tax due on the gain until the time of withdrawal. When the traditional 401(k) plan participant accesses the funds, 100% of the withdrawal will be taxable, because none of the money has yet been subject to taxation. Traditional 401(k) plan participants are required to start withdrawing at least a minimum amount from this type of plan, starting at age 72.

Roth 401(k)s are funded with after-tax money. So, participants in Roth plans do not get an upfront tax break when they make contributions. However, the money that is in a Roth 401(k) is allowed to grow tax-free. In addition, withdrawals are also tax-free – regardless of what the then-current income tax rates are. Also, there are no required minimum distribution (RMD) rules with Roth 401(k) plans. 

401(k) Contribution Limits

The 401(k) contribution limits for 2020 and 2021 are $19,500 for plan participants who are age 49 and younger, and an additional $6,500 (for a total of $26,000) for those who are age 50 or older.

For investors who want to add to their tax-deferred (or tax-free) growth but have already “maxed out” the contributions to an IRA and/or 401(k), purchasing a deferred annuity would allow for this, without an annual maximum contribution imposed. (Although annuities typically have early withdrawal penalties/surrender charges if funds are accessed within a certain period of time.)

529 Savings Plan

A 529 savings plan is a tax-advantaged account that is designed for helping to pay for education expenses. This includes traditional schooling, as well as the cost of apprenticeship programs. There are two different types of 529 options – savings plans and prepaid tuition plans.

The 529 savings plans grow on a tax-deferred basis. Withdrawals are tax-free, provided that the money is used for qualified education expenses. Prepaid tuition plans allow the 529 account owner to make contributions in advance for tuition at certain colleges and universities. In this case, today’s tuition cost may be “locked in” for future education.

While anyone is eligible to open a 529 plan, they are typically owned by parents and/or grandparents of the student. Because 529 savings plans are actually run by each of the U.S. states, the rules may differ from one plan to another. 

 

Find the most credible, highest-rated Safe Money advisors in your area.

If you are nearing retirement or already retired, you should consider safe money because your future is too bright to risk.

Are you a safe money expert?

Tell us what you think.

We value your feedback.

    TERMS OF USE

    1