Retirement Plan Terms & Definitions:

401(k) – an employer-created plan where employee contributions are made pre-tax directly from their paychecks for retirement.  Employers may also have a contribution matching program where they will match a certain percentage of the employee contributions.

Annuity – a financial product that issues payments to an individual usually on retirement, offering a reliable means of steady income.

Beneficiary – any person who is designated to receive distributions from a policy or plan after a specific event occurs (usually a death).

IRA Plan – an individual retirement plan where contributions are made from pre-tax dollars, but, as such, all eligible withdrawals will be subject to income tax.

Direct Rollover – moving funds from one qualified plan to another without tax implications usually through a check made payable to the new qualified plan (not to a direct individual).

Early Withdrawal – removing funds from an investment before a designated time, which usually incurs an additional fee.

Estate Planning – preparing for the management of assets after a person’s death or incapacitation.  This may include; writing a will, setting up a trust, naming an executor, designating beneficiaries, creating a living will, creating annual gift arrangements, etc.

Four Percent Rule – a financial planning suggestion that a retiree should only withdraw 4% of their entire nest egg each year of their retirement.  This is a good indicator to see how much money is required for retirement and how many years you can comfortably retire without over-spending your funds.

Fully Vested – the right to an entire amount of a benefit, usually after a specified amount of time.  (For example, some companies may stipulate that an employee must remain with the company for five years in order to be fully vested in their 401(k) plan.)

Hardship Withdrawal – the option to withdraw funds from a 401(k) plan for an emergency situation.  These funds are permanently removed from the account and are subject to a 10% early withdrawal penalty and all applicable income tax.  IT IS USUALLY A LAST RESORT OPTION.

IRA Rollover – a transfer of funds from one retirement account to either a Traditional IRA or a Roth IRA.  This happens through a direct transfer and is a non-taxable event.

Living Will – also known as an ADVANCED DIRECTIVE, a legal document that specifies the medical care that a person does or does not want, should he or she become unable to communicate their wishes.

Last Will & Testament – a legal document which details and explains a person’s final wishes regarding the distribution of their assets.

Lump Sum Distribution – a one-time payment for an entire amount, rather than a timed schedule of smaller payments.  Some lump sum distributions may be taxed with special consideration.

Pay Yourself First – a budgeting strategy where a certain percentage is put aside automatically from a person’s paycheck for investing for retirement or for savings.

Personal Trust – a legal entity which can authorize the financial management of assets for beneficiaries.  They are used to accomplish financial goals, such as education expenses, meet special needs of beneficiaries, or reduce or avoid estate taxes.

Rollover IRA – an account that allows the transfer of funds from a previous employer-sponsored retirement account.  The purpose of a rollover IRA is to ensure that the tax-deferred benefits are maintained in the transfer.  If you were to close the old retirement account, you would be penalized with an early withdrawal penalty and be required to pay taxes, 20%, on all assets.  By rolling the funds over into a Rollover IRA, you would avoid those charges.

Roth IRA – an individual retirement plan where the contributions are made with after-tax dollars and, as such, all eligible withdrawals will be tax-free.  This is the OPPOSITE of a traditional IRA.

Roth 401(k) – an employer-sponsored investment saving account where employee contributions are made with after-tax dollars, and as such, eligible withdrawals are not subject to tax.

Social Security Benefits – monthly payout to retired workers who have contributed to Social Security system over the course of their careers. (Depending on your level of income at retirement, these payments may be taxable.)

Trust – a relationship where a trustor gives a trustee the right to hold property or assets for the benefit of a third party, the beneficiary.  These are created to provide legal protections to the trustor’s assets and reduce estate taxes upon transfer.

Transfer on Death (TOD) – a designation where beneficiaries receive assets at the time of a person’s death without requiring a probate.  The beneficiaries have no control over these assets while the owner is still alive.

Vested Interest – the right of an individual to gain access to an asset at a future date.  Most often used in reference to employer-contributions for multiple company-sponsored retirement plans.

Withdrawal Benefits – the right to contributions made to an employer-sponsored plan when an employee leaves a company.  Employees always have right to their own contributions, and may have rights to employer contributions after a “vesting period” is fulfilled.

Withdrawal Penalty – an amount incurred for early withdrawal from an account that has a “locked in” period (such as an IRA).  This amount is usually a percentage (10% typically) or a forfeiture of interest (such as for a CD).