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Financial Planning

A Glossary of Financial Terms

IRAs, Annuities, Wills, Estates, Powers of Attorney… there are many financial terms to know.  Here are a few essentials as you begin to explore your financial future. 
 
Be sure to consult your financial advisor or an estate planning lawyer for specifics about your individual situation. 
 
Each person’s situation is different, and can affect the various investment and strategies differently.
 

Annuity

An annuity is a long-term, retirement investment offered by insurance companies. There are several types of annuities, and some are used by businesses as a means to pay pensions to retired employees.  Individual investors can also purchase annuities, either via lump sum contribution or contributions over time, to which they add monies that grow tax-deferred.  Upon retirement, annuities can offer a steady stream of payments through the end of life. 
 

Catch Up Contributions

Older workers are allowed by the IRS to “catch up” their retirement savings and contribute much more to 401(k) plans and IRA's than their younger counterparts.  For example, those 50 and older can contribute an additional $4,000 more than their younger counterparts, up to a maximum of $18,000 to their 2005 401(k). Contribution limits will increase to $20,000 in 2006.
 

Defined Benefit Plans Employer Retirement Plans

Defined Benefit Plans are generally funded by the employer and at retirement pay a benefit based on a formula that takes in to account years of service and last or highest salaries.
 

Defined Contribution Plans

These are employer-sponsored, tax-deferred retirement savings plans, for instance, 401(k) plans.  Employers may match some portion of the individual’s contribution.  When the employee retires, he or she has a lump sum of money to use for retirement income.
 

Durable Power of Attorney

A legal document in which you designate another person to act on your behalf if you become incapacitated or disabled.  This person will have the power to manage your finances and estate, write checks, and take care of other responsibilities. A second type of Durable Power is for the person to make medical decisions if you are not able to make your wishes known.
 

Estate Assets

All assets owned by you at the time of your death.  This includes the value of all retirement plans, life insurance policies, property and other assets.  Proper estate planning helps you avoid unnecessary taxes for your heirs.
 

Estate Planning

The process of planning and creating necessary legal documents that establish the disposition of your assets after your death and help ensure that your heirs can avoid legal and financial complications and excessive expenses and taxes. A plan also can include any charitable bequests you wish to make. An excellent estate planning glossary can be found at Speaking the Language of Estate Planning.
 

Financial Planner

Anyone can hang out a shingle and call themselves a financial planner.  The government regulates only stock brokers, insurance agents, or investment advisors. You should carefully assess whether the financial planner you are hiring is qualified to offer you advice. See How to Choose a Planner for helpful hints and interview questions to use in selecting a qualified financial advisor. This site also has a listing by zip codes of Certified Financial Planners who maintain their credentials through continuing education and practice.
 

Individual Retirement Account (IRA)

Depending upon your income level, you can invest in either a traditional or a Roth IRA.  There are no income limits for contributing to a traditional IRA except if you are part of a qualified retirement plan.  In an IRA, your money grows tax-deferred and then is taxed as ordinary income upon withdrawal.  Your annual contributions to your traditional IRA may be tax-deductible if you are within the income limits.
 

Intestate

Intestate is dying without a will. All assets pass to your heirs according to state laws.  If you have minor children, the state determines their guardians.  To have the most control over the disposition of your assets, you should have a will.
 

Living Trust

A trust established during the Grantor’s lifetime.  This may be a useful tool for people with complicated assets in different estates or assets that need to be managed.  See “Trusts.”
 

Payout Options from Retirement plans

When you are ready and eligible to receive distributions from your retirement funds, you can “annuitize” some of your retirement savings (e.g., those in a company retirement plan), and request installment payments. You pay income taxes only on what is distributed to you annually, and the rest of your savings stay in the account growing tax-deferred.
 

Power of Attorney

See Durable Power of Attorney.
 

Probate

Probate is a legal process for settling estates, including determining heirs, paying creditors, and distributing assets.
 

Required Minimum Distribution

Upon turning 70-1/2 years old, you will be required by the IRS to withdraw a minimum amount from your retirement accounts — except Roth IRAs —  each year.  This is called the “Required Minimum Distribution” and knowing this figure can be important as you plan your retirement finances.  Retirement calculators offered by many financial services websites can help you determine your required minimum distribution.
 

Roth IRA

A Roth IRA is an individual retirement account for those with an adjusted gross income (AGI) of $95,000 for single tax filers and $150,000 for joint tax filers. Unlike traditional IRAs, Roth IRA contributions are not tax-deductible; however, contributions can be withdrawn penalty-free and tax-free at any time.  And, because there are no “required minimum distributions” when you hit retirement age, it is a good plan from which to transfer money to your heirs as it will continue to grow tax free.  Earnings taken out without a qualifying event are assessed a penalty.
 

Trusts

A trust is a device that allows you to transfer money and other assets to one or more beneficiaries.  Different types of trusts (e.g., bypass or A/B trusts, etc.) can accomplish specific goals.  Trusts are either revocable or irrevocable, and living/inter vivos (created and effective while you are alive) or testamentary (created by your will and effective upon your death). Trusts must be drawn up by a lawyer knowledgeable in this area.  Trusts can remove assets from your gross estate if set up correctly and if the assets are not controlled by the grantor.
 

Unlimited Marital Deduction

Under current Federal law, you can pass an unlimited amount to your spouse (assuming he/she is a U.S. citizen) upon your death without incurring estate tax. While alive, you may give up to $11,000 per year to as many individuals as you like without creating an estate tax event.
 

Will

A will is a legal document that establishes your wishes for the disposition of your assets after your death. If, at the time of death, you do not have a will or it is not properly made, your assets will be distributed according to the state’s intestacy statute. To be sure your estate goes to those whom you designate, and to avoid unnecessary taxes and other expenses, consult a lawyer with expertise in wills and estate planning. Wills made in another state should be reviewed for the state in which you now reside.  Your will also should be reviewed periodically to ensure that it is up to date.
 
You can learn much more about personal finance from many sources, including—
 
 
 
 
You can also find helpful info at the Motley Fool and Kiplinger Finance Magazine and many other finance sites.