A look at common terms used in financial planning.

401(k): Employer-sponsored plan that allows employees to contribute money before taxes are taken out. Employers often match contributions. Interest, dividends and capital gains accumulate tax-free until withdrawn.

403(b): Like a 401(k), but for employees of nonprofit and tax-exempt entities such as school systems.

Annuity: Contract sold by an insurance company that agrees to pay either a regular, fixed amount when you retire or an amount based on how much your investment earns. Earnings are taxed upon withdrawal.

Bequest: A direct gift of cash or assets from an estate after death.

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Bond: An IOU issued by a company or a unit of government promising to pay interest at a certain rate and to repay the principal at a specified time.

Capital gains: Profits from selling stocks at a price higher than the cost.

Certificate of deposit (CD): A deposit that earns a specified interest rate for a certain time period.

Defined benefit: Employer-funded pension plan that pays employees who retire a set amount based on a certain number of years worked. A traditional pension plan.

Defined contribution: Pension plan in which employees and employers may contribute, with retirement payouts determined by how well the investment performs. A 401(k) or 403(b) plan.

Disability insurance: Insurance policy that pays benefits to the insured should he or she not be able to work.

Dividends: Periodic cash payments made by corporations and mutual funds to their stockholders.

Health Savings Account: A new option for health insurance with two parts. The first is a health insurance policy that covers large hospital bills. The second part is an investment account or retirement account from which you can withdraw money tax-free for medical care. Otherwise, the money accumulates with tax-free interest until retirement, when you can withdraw for any purpose and pay normal income taxes.


Income-producing stock: Stock in a company that pays dividends.

Individual retirement account (IRA): A personal, tax-deferred retirement account. There are two kinds, the traditional and the Roth. A contribution into a traditional IRA may be tax-deductible and is limited to up to $3,000 a year unless you are over 50 and then goes up to $3,500. Money is taxed upon withdrawal, and significant penalties may occur on withdrawals before age 59-1/2. Contributions to Roth IRAs are not tax-deductible, but earnings and withdrawals are tax-free as long as the account has been open at least five years.

Interest rate: What it costs you to borrow money, such as through a credit card or home or auto loan. Usually expressed as an annual percentage rate.

Long-term-care insurance: Insurance to cover long-term personal or custodial care.

Marketable securities: In general, stocks and bonds that are easily sold. A marketable security has a readily determined fair market value and can be converted into cash at any time.

Mortgage: An IOU to repay a real-estate lender, who holds a lien on the property until the loan is repaid with interest.

Real Estate Investment Trust (REIT): A company, often with shares traded on a stock exchange, that manages a portfolio of real-estate holdings.

Pension: Payments by a company to an employee who retires, usually based on how much the employee earned and how long he or she worked at the company.

Securities: Proof of ownership, such as a stock certificate issued by a company or a bond issued by a government entity.

Simplified Employee Pension Plan (SEP IRA): A pension plan used by small employers (or the self-employed) in which both employee and employer contribute.

Tax-deductible interest: Interest paid on a loan, such as a mortgage, that can be deducted from income taxes.

Tax-deferred: An investment such as a 401(k) plan or individual retirement account in which interest, dividends and capital gains are not taxed until the money is withdrawn.

Trust: A legal entity, administered by a trustee, set up to provide for heirs.

Sources:
This glossary includes material from the U.S. Department of Labor’s “Savings Fitness” publication (available at www.dol.gov/ebsa or toll-free at 1-866-444-3272); “The Wall Street Journal’s Guide to Planning Your Financial Future”; and www.hsainsider.com.