Investing for Retirement: 401(k), 403(b), and 457 Plans


Account Balance: Your total value in the 401(k) plan, including contributions and earnings as well as any rollover amounts transferred into the plan.

After-Tax: Money you have already paid income tax on. Some 401(k) plans allow you to contribute after-tax money to the plan.

Annuity: An investment that pays out a fixed sum of money each year.

Asset Allocation: Diversifying your assets to minimize risk.

Beneficiary: The person(s) you have designated to receive benefits when you die.

Closed-End Fund: A fund you must hold until maturity or sell on an exchange.

Contributions: The amount of your pay that you elect to put into your 401(k) plan.

Direct Rollover: Rollovers to and from retirement plans where the money is directly transferred from plan to plan.

Diversification: The concept of reducing risk by investing your money in different types of investments.

Dollar-Cost Averaging: Investing fixed sums of money over a long time period to reduce the risk of buying investments at peak prices.

401(k) Loan: Money borrowed from your 401(k) account.

Hardship Withdrawal: Taking money out of your account if you have an immediate and heavy financial need. You will be required to pay ordinary income tax and possibly a 10% penalty on the withdrawal.

Individual Retirement Annuity: An annuity contract, issued by an insurance company, which meets specific tax requirements.

Investment Options: The different funds that you can choose from to invest your money.

Liquidity: The ease with which something can be converted to cash.

Lump-Sum Distribution: A distribution to you in one taxable year of all the money in your retirement plan.

Maturity: When an investment comes due.

Open-end Fund: A fund you can freely buy and sell from a bank, broker, or mutual fund company.

Portfolio: Refers to the makeup of all of your investments, both inside and outside your 401(k) plan.

Pre-tax Contribution: Money you have not paid tax on. Your taxable income is reduced by the amount of pre-tax money you contribute to your 401(k) plan.

Promissory Note: A signed promise to repay the amount of money you have borrowed from the plan.

Prospectus: A document giving detailed information about an investment to prospective buyers.

Qualified Retirement Plan: A plan that meets complex requirements of the Internal Revenue Code. Contributions to qualified plans and the resulting earnings are tax-deferred.

Risk Tolerance: A measure of your ability to risk principal for a higher return on your investments.

Rollover: A transfer of the money in your 401(k) account into another retirement plan or IRA.

Roth IRA: A type of Individual Retirement Account (IRA) that will allow you to save money on a tax-free basis, provided you meet the eligibility requirements and the holding period rules.

Tax-Deferred: Money that will be taxed at some point in the future.

Tax-Free: Money that will not be taxed.

Time Horizon: The amount of time between now and one of your financial goals.

Vesting: An employee's non-forfeitable right to benefits or monies earned. Pensions and profit-sharing plans have vesting schedules, typically defining how long an employee has to be an active participant in a plan before he or she is entitled to a portion or all of the benefits earned.

Withholding: The amount taken out of your distribution to be used to pay income taxes.

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