is a means of leaving one's current situation after a predetermined objective has been achieved.
Under United States federal income tax law, filing status determines which tax return form an individual will use and is an important factor in computing taxable income. Filing status is based on marital status and family situation.
There are five possible filing status categories: single individual, married person filing jointly or surviving spouse, married person filing separately, head of household and a qualifying widow(er) with dependent children. A taxpayer who qualifies for more than one filing status may choose the most advantageous status
Retirement Strategy/Retirement Plan
Planning for retirement is a multi-step process that evolves over time. The following are five steps everyone should take, no matter what age, to build a solid retirement plan. Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program and managing assets.
Bucket Approach/Bucket Strategy
You divide your retirement money into three buckets: One is for cash that you'll need in the next year or two, including major expenses, such as a vacation, a car or a new roof. The next is for money you'll need in the next 10 years. The final bucket is for money you'll need in the more distant future, either for you or your heirs. The bucket system "gives you the confidence and peace of mind to stay the course
Systematic withdrawal is a method of receiving income in regular installments from your mutual fund accounts, retirement plans, or annuity contracts.
For the context of retirement planning, this is the target age goal to cease working for a salary and begin to implement the retirement strategy for replacing income. Retirement age is determined in various ways. Some people never want to retire so this is a moving target. In the financial world, the truer measure of retirement readiness or delay is that a person is working because the choose to work and not because the have to for the income to survive.
Required Minimum Distribution
A required minimum distribution is the amount that owners of a traditional, SEP or SIMPLE IRA account and qualified plan participants must begin withdrawing from their retirement accounts by April 1 following the year they reach age 70 1/2.
Qualified Account Examples
•Money purchase plans
•Target benefit plans
•Employee stock ownership (ESOP) plans
•Simplified Employee Pension (SEP)
•Savings Incentive Match Plan for Employees (SIMPLE)
Non Qualified Account
Non-qualified plans are those that are not eligible for tax-deferral benefits under ERISA. Consequently, deducted contributions for non-qualified plans are taxed when the income is recognized. In other words, the employee will pay taxes on the funds before they are contributed to the plan
Qualified plans come in two main types: defined benefit and defined contribution, though there is also a hybrid of the two called a cash balance plan. Defined benefit plans give employees a guaranteed payout and place the risk on the employer to save and invest properly to meet plan liabilities. A traditional annuity-type pension is an example of a defined benefit plan. Under defined contribution plans, the amount employees receive in retirement depends on how well they save and invest on their own behalf during their working years.
Defined benefit plans
A defined benefit plan is a retirement account for which your employer does all the work, including ponying up the money and deciding where to invest it. It promises you a set payout when you retire, based on your salary and how long you worked there.
There are two basic kinds of defined benefit plans: pensions and cash-balance plans. These plans are a sweet deal. In general, you just show up for work and, assuming you meet basic eligibility rules, you're automatically enrolled in the plan. (In some instances, however, you aren't enrolled until you've completed your first year on the job.) You also need to stick around on the job for several years - typically five - to be fully "vested" in the plan. If you leave before then, you will forfeit any unvested pension benefits
is a retirement plan in which the employee and/or the employer contribute to the employee’s individual account under the plan. The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. Generally, the contributions and earnings are not taxed until distribution. The value of the account will change based on contributions and the value and performance of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.
Employee Stock Ownership Plan (ESOP)
is a type of defined contribution plan that is invested primarily in employer stock
Cash Balance Plan
A type of defined benefit plan that includes some elements that are similar to a defined contribution plan because the benefit amount is computed based on a formula using contribution and earning credits, and each participant has a hypothetical account. Cash balance plans are more likely than traditional defined benefit plans to make lump sum distributions.
Profit Sharing Plan
s a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) feature.
Safe Harbor 401 (k)
A safe harbor 401(k) is similar to a traditional 401(k) plan, but the employer is required to make contributions for each employee. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the rules ordinarily applied to traditional 401(k) plans.
Savings Incentive Match Plan for Employees of Small Employers
A plan in which a business with 100 or fewer employees can offer retirement benefits through employee salary reductions and employer non-elective or matching contributions (similar to those found in a 401(k) plan). It can be either a SIMPLE IRA or a SIMPLE 401(k). SIMPLE IRA plans impose few administrative burdens on employers because IRAs are owned by the employees, and the bank or financial institution receiving the funds does most of the paperwork. While each has some different features, including contribution limits and the availability of loans, required employer contributions are immediately 100 percent vested in both.
Simplified Employee Pension Plan
A plan in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it isn't subject to the reporting and disclosure requirements of most retirement plans.
Summary Plan Description
A document provided by the plan administrator that includes a plain language description of important features of the plan, for example, when employees begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when payment is received and in what form, and how to file a claim for benefits. Participants must be informed of material changes either through a revised Summary Plan Description or in a separate document called a Summary of Material Modifications.
Individual Retirement Account
An individual account or annuity set up with a financial institution, such as a bank or a mutual fund company. Under federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax deferred. In addition, participants can transfer money from an employer retirement plan to an IRA when leaving an employer. IRAs also can be part of an employer plan.
is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage
Tax Sheltered Annuity
A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed.
A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.
You cannot deduct contributions to a Roth IRA.
If you satisfy the requirements, qualified distributions are tax-free.
You can make contributions to your Roth IRA after you reach age 70 ½.
You can leave amounts in your Roth IRA as long as you live.
The account or annuity must be designated as a Roth IRA when it is set up.
A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. A Keogh plan can be set up as either a defined-benefit or defined-contribution plan, although most plans are defined as contributions.
Hardship Distribution/Hardship Withdrawal
A retirement plan may, but is not required to, provide for hardship distributions. Many plans that provide for elective deferrals provide for hardship distributions. Thus, 401(k) plans, 403(b) plans, and 457(b) plans may permit hardship distributions.
If your 401(k) plan allows for hardship withdrawals if would be for one of the six reasons below:
Unexpected medical expenses
Costs relating to the purchase of a home
Tuition and related educational fees and expenses
Payments necessary to prevent eviction from, or foreclosure on, your home
Burial or funeral expenses
Expenses for the repair of damage to your home
Substantially Equal Periodic Payments
A substantially equal periodic payment plan allows individuals who have invested in an IRA or another qualified retirement plan to withdraw funds prior to the age of 59 1/2 and avoid income tax and early withdrawal penalties.
A rollover may entail a number of actions, most popularly the transfer of the holdings ... A rollover IRA or IRA rollover is a transfer of funds from a retirement account into a traditional IRA or a Roth IRA
Types of Rollovers
is a fund into which a sum of money is added during an employee's employment years, and from which payments are drawn to support the person's retirement from work in the form of periodic payments.
An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time.
The insurance company promises you a minimum rate of interest and a fixed amount of periodic payments. Fixed annuities are regulated by state insurance commissioners.
The insurance company allows you to direct your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses. The SEC regulates variable annuities
This annuity combines features of securities and insurance products. The insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index.
Mortality and expense risk charge
This charge is equal to a certain percentage of your account value, typically about 1.25% per year.
A key employee is an employee with a major ownership and/or decision-making role in the business. Key employees are usually highly compensated. They may also receive special benefits as an incentive both to join the company and to stay with the company.
The 457 plan is a type of non-qualified, tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax or after-tax (Roth) basis.
An active participant is someone who receives benefits under an employer sponsored retirement plan or participates in a retirement plan.
The Employee Retirement Income Security Act of 1974
protects Americans’ retirement assets by implementing rules that qualified plans must follow to ensure that plan fiduciaries do not misuse plan assets.
A Solo 401(k)
a Self Employed 401(k) or Individual 401(k)) is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s).
The Economic Growth and Tax Reconciliation Relief Act of 2001
U.S. tax law signed by President George W. Bush that made significant changes to retirement plan rules and overall tax rates
A vesting schedule is an incentive program set up by an employer which, when it is fully "vested," gives the employee full ownership of certain assets — usually retirement funds or stock options. To be 100 percent vested means that you are able to take all of your retirement benefits with you if you leave or have been fired
There are limits to how much employers and employees can contribute to a plan (or IRA) each year. The plan must specifically state that contributions or benefits cannot exceed certain limits. The limits differ depending on the type of plan.
Deferred compensation is a portion of an employee's compensation that is set aside to be paid at a later date.
a way for business owners or companies to provide additional supplemental benefits to key employees or executives of their choice
The law permits a plan to distribute an account after certain events (distributable events). Different distributable events apply to different types of plans, and different types of contributions or accounts within those plans. The plan is not required to allow distributions for every possible distributable event.
The plan document must clearly state when a distribution will be made.
Earnings typically refer to after-tax net income, sometimes known as the bottom line, or a company's profits. Earnings are the main determinant of a company's share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. Earnings are perhaps the single most important and most studied number in a company's financial statements, because they show profitability compared with analyst estimates and company guidance.
Wealth measures the value of all the assets of worth owned by a person, community, company or country. Wealth is determined by taking the total market value of all physical and intangible assets owned, then subtracting all debts. Essentially, wealth is the accumulation of resources.
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non publicly tradable securities, like real estate, art, and private investments. Portfolios are held directly by investors and/or managed by financial professionals and money managers. Investors should construct an investment portfolio in accordance with their risk tolerance and their investing objectives. Investors can also have multiple portfolios for various purposes. It all depends on one's objectives as an investor.
addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
a person who collects the benefits of an annuity or pension, or named in a specialized life insurance contract. The annuitant is the beneficiary of an annuity or pension. An annuitant can be the contract holder or another person.
A single-life payout means only the employee will be receiving the payments for the rest of his/her life, but the payments stop upon his/her death.
The joint-life payout option allows the retiree to receive benefits during the remainder of his/her life and guarantees income for another person after he/she has died
Annuity that guarantees regular payment of a certain sum for the life of the annuitant. In case he or she dies before the completion of a specified period, the payments are made to a designated beneficiary until the end of that period.
Tax-deferred growth is investment growth that's not subject to taxes immediately, but is instead taxed down the line. Perhaps the most common example of tax-deferred growth is that which you'll get in a retirement plan like a traditional IRA or 401(k). Annuities also offer tax-deferred growth, making them a viable though perhaps less popular option for generating retirement income.
Tax free refers to certain types of goods and financial securities (such as municipal bonds) that are not taxed. It also refers to earnings that are not taxed.
There are two kinds of taxable income: Earned income (salary, wages, tips, bonuses, commissions, etc.) and unearned income (dividends, interest, rents, alimony, winnings, royalties, etc.).
the distribution of reward from a portion of company's earnings and is paid to a class of its shareholders. ... Dividends can be issued as cash payments, as shares of stock, or other property, though cash dividends are the most common.
A gain is an increase in the value of an asset or property. A gain arises if the selling price of the asset is higher than the original purchase price. A gain can occur anytime in the life of an asset.
A capital loss is the loss incurred when a capital asset, such as an investment or real estate, decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price.
Portability is an employee's ability or right to retain certain benefits when switching employers. Benefits such as certain pension plans and health insurance have portability. Most 401(k) plans have portability of benefits as well as health savings accounts (HSAs).
a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an account are not subject to federal income tax at the time of deposit.
High-Deductible Health Plan (HDHP)
can be combined with a health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes. The IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.
a designated party, usually a company or employer, that sets up a healthcare or retirement plan, such as a 401(k), for the benefit of the organization's employees
A 401(k) plan sponsor is the plan fiduciary, legally responsible for selecting the plan’s investment options and monitoring their suitability. Generally, your employer is your 401(k) plan sponsor.
Catch Up Contribution
An additional contribution that individuals aged 50 or older are permitted to make to an individual retirement account (IRA) or employer-sponsored retirement savings plan in excess of the annual contribution limit.
a tax-advantaged savings plan designed to encourage saving for future education costs.
Stock represents a claim on the company's assets and earnings. Stock is the capital raised by the company
represent a claim on profits (dividends) and confer voting rights. Common stockholders are last in line for the company's assets
represent a piece of ownership in a company. preferred stockholders don't usually have any voting rights.
Preferred shareholders are given a higher priority than common shareholders in a number of regards
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments.
The answer will vary based on your age, experience, net worth, risk capital and the actual investment or trade being considered.
a commission or sales charge applied at the time of the initial purchase of an investment. ... The front-end load is deducted from the initial deposit, or purchase funds and, as a result, lowers the amount of money actually going into the investment product.
An investment horizon refers to the length of time that an investor is willing to hold the portfolio for.
It is generally commensurate with the amount of risk that an investor is willing to undertake and her income.
A lump-sum payment is an often large sum that is paid in one single payment instead of broken up into installments. They are sometimes associated with pension plans and other retirement vehicles, such as 401k accounts, where retirees accept a smaller upfront lump-sum payment rather than a larger sum paid out over time.
These brokers tend to offer a wide array of services and products, including financial and retirement planning, investing and tax advice and regular portfolio updates.
stockbrokers that charge reduced commissions on transactions, a self-service model
minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms
security is a bond or other type of debt obligation that is issued by a government with a promise of repayment upon the security's maturity date
A government bond is a type of debt-based investment, where you loan money to a government in return for an agreed rate of interest. Governments use them to raise funds that can be spent on new projects or infrastructure, and investors can use them to get a set return paid at regular intervals.
a fancy name for an investment partnership. It's the marriage of a professional fund manager, who can often be known as the general partner, and the investors, sometimes known as the limited partners, who pool their money together into the fund.
Exchange Traded Fund
a basket of securities such as stocks that tracks an underlying index. An exchange-traded fund is a marketable security meaning it can be bought and sold since the ETF has a price associated with it. ETFs can contain all types of investments including stocks, commodities, or bonds
investment strategies that allow you to pool your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own.the decisions to buy and sell securities are made by one or more portfolio managers, supported by teams of researchers
an investment that represents a share, or partial ownership, of a company. Stocks are one of the best ways to build wealth
Municipal bonds (or “munis” for short) are debt securities issued by states, cities, counties and other governmental entities to fund day-to-day obligations and to finance capital projects such as building schools, highways or sewer systems. Generally, the interest on municipal bonds is exempt from federal income tax. The interest may also be exempt from state and local taxes if you reside in the state where the bond is issued.
General Obligation Bond (GO)
issued by states, cities or counties and not secured by any assets. Instead, general obligation are backed by the “full faith and credit” of the issuer, which has the power to tax residents to pay bondholders.
are not backed by government’s taxing power but by revenues from a specific project or source, such as highway tolls or lease fees. Some revenue bonds are “non-recourse”, meaning that if the revenue stream dries up, the bondholders do not have a claim on the underlying revenue source.
a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person.
the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.
Medicare is the federal health insurance program
Medicare Part A
Part A covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home health care.
Medicare Part B
Part B covers certain doctors' services, outpatient care, medical supplies, and preventive services.
Medicare Part D
Part D covers prescription drug coverage
Social Security Benefits
payments made to qualified retirees and disabled people, and to their spouses, children, and survivors
income taxes can be your single largest expense in retirement. You can't avoid income taxes during retirement. But once you stop working, you stop paying taxes for Social Security and Medicare, which can add several thousand dollars to your bottom line.
Taxation of Retirement Income
income taxes can be your single largest expense in retirement.
Taxation of Social Security Benefits
Check the base income amounts in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Generally, the higher that total income amount, the greater the taxable part of your benefits. This can range from 50 to 85 percent depending on your income. There is no tax break at all if you're married and file separate returns.
Taxes on Pension Income
You will owe federal income tax at your regular rate as you receive the money from pension annuities and periodic pension payments. But if you take a direct lump-sum payout from your pension instead, you must pay the total tax due when you file your return for the year you receive the money
Taxes on IRAs and 401(k)s
You can find instructions for calculating what you owe in IRS Publication 590, Individual Retirement Arrangements.
Taxes on ROTH IRA
If you have a Roth IRA, you'll pay no tax at all on your earnings as they accumulate or when you withdraw following the rules. But you must have the account for at least five years before you qualify for tax-free provisions on earnings and interest.
Managing Taxable Accounts
Interest paid on investments in taxable accounts is taxed at your regular rate
Managing Other Income: Capital Gains
a rise in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold.
Short Term Capital Gain/Loss
asset held for one year or less is a short-term gain or loss
Long Term Capital Gain/Loss
Asset held for more than 1 year
Planning for Gifts and Bequests
prior to your death, you can make gifts to whomever you wish. The ceiling changes from time to time. In 2018, you can make a gift of up to $15,000 per year, or $30,000 per year if you're married, to as many individuals as you like without ever owing federal gift taxes on the amount.
Inherited IRA/Beneficiary IRA
An inherited IRA is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies. The individual inheriting the Individual Retirement Account (IRA) (the beneficiary) may be anyone — a spouse, relative or unrelated party or entity (estate or trust).
The primary beneficiary (or beneficiaries) inherit first. If they are dead or if they die with you, your assets would instead go to any secondary beneficiaries you have designated. These secondary beneficiaries are often referred to as contingent beneficiaries on account forms.
Cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends and return of capital distributions
IRA basis is the funds in an IRA that already have been taxed, either as nondeductible IRA contributions or after-tax funds rolled over from plans. ... If basis is not taken into account, tax-free withdrawals can become taxable, meaning the funds will be taxed twice
Roth IRA Conversions
A Roth IRA Conversion is a reportable movement of assets from a Traditional, SEP, or SIMPLE IRA to a Roth IRA, which is a taxable event.
A recharacterization allows you to treat a regular contribution made to a Roth IRA or to a traditional IRA as having been made to the other type of IRA
Annual Contribution Limits
The maximum amount a person can contribute to his or her retirement account is set each year by the IRS after taking inflation into account
Inflation is the increase in the prices of goods and services over time. It's an economics term that means you have to spend more to fill your gas tank, buy a gallon of milk, or get a haircut. Inflation increases your cost of living. Inflation reduces the purchasing power
Employer Contributions (HSA)
a tax savings benefit for employees. Money can be used for approved expenses dependent care services, dental care, vision care, and medical or health issues
coverage for a certain time period. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.
Permanent Life Insurance
life insurance plans that do not expire permanent life insurance combines a death benefit with a savings portion, allowing policies to build a cash value, against which the policy owner can borrow funds or, in some instances, withdraw cash to help meet needs such as paying for a child's college education or covering medical expenses.