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Adjusted
Gross Income (AGI)
An interim calculation in the computation of income tax
liability. It is computed by subtracting certain allowable
adjustments from gross income.
Administrator
A person appointed by the court to settle an estate when there is
no will.
After-Tax Return
The return from an investment after the effects of taxes
have been taken into account.
Aggressive Growth Fund
A mutual fund whose primary investment objective is substantial
capital gains.
Alternative Minimum Tax
A method of calculating income tax that disallows certain
deductions, credits, and exclusions. This was intended to ensure
that individuals, trusts, and estates that benefit from tax
preferences do not escape all federal income tax liability. People
must calculate their taxes both ways and pay the greater of the
two.
Annuity
An insurance-based contract that provides future payments
at regular intervals in exchange for current premiums. Annuity
contracts are usually purchased from banks, credit unions,
brokerage firms, or insurance companies.
Asset
Anything owned that has monetary value.
Asset Allocation
The process of repositioning assets within a portfolio to maximize
return for a given level of risk. This process is usually done
using the historical performance of the asset classes within
sophisticated mathematical models.
Asset Class
A category of investments with similar characteristics.
Audit
The examination of the accounting and financial documents of a
firm by an objective professional. The audit is done to determine
the records' accuracy, consistency, and conformity to legal and
accounting principles.
Balanced
Mutual Fund
A mutual fund whose objective is a balance of stocks and bonds.
Such funds tend to be less volatile than stock-only funds.
Bear Market
When the stock market appears to be declining overall, it is said
to be a bear market.
Beneficiary
A person named in a life insurance policy, annuity, will, trust,
or other agreement to receive a financial benefit upon the death
of the owner. A beneficiary can be an individual, company,
organization, and so on.
Blue Chip Stock
The common stock of a company with a long history of profitability
and consistent dividend payments.
Bond
A bond is evidence of a debt in which the issuer promises to pay
the bondholders a specified amount of interest and to repay the
principal at maturity. Bonds are usually issued in multiples of
$1,000.
Book Value
The net value of a company's assets, less its liabilities and the
liquidation price of its preferred issues. The net asset value
divided by the number of shares of common stock outstanding equals
the book value per share, which may be higher or lower than the
stock's market value.
Bull Market
When the stock market appears to be advancing overall, it
is said to be a bull market.
Buy-Sell Agreement
A buy-sell agreement is an arrangement between two or more parties
that obligates one party to buy the business and another party to
sell the business upon the death, disability, or retirement of one
of the owners.
Capital
Gain or Loss
The difference between the sales price and the purchase price of a
capital asset. When that difference is positive, the difference is
referred to as a capital gain. When the difference is negative, it
is a capital loss.
Cash Equivalents
Short-term investments, such as U.S. Treasury securities,
certificates of deposit, and money market fund shares, that can be
readily converted into cash.
Cash Surrender Value
The amount that an insurance policyholder is entitled to receive
when he or she discontinues coverage. Policyholders are usually
able to borrow against the surrender value of a policy from the
insurance company. Loans that are not repaid will reduce the
policy's death benefit.
CERTIFIED FINANCIAL PLANNERä Practitioner
A credential granted by the Certified Financial Planner Board of
Standards, Inc. (Denver, CO) to individuals who complete a
comprehensive curriculum in financial planning and ethics. CFPä,
CERTIFIED FINANCIAL PLANNERä and federally registered CFP (with
flame logo)® are certification marks owned by the Certified
Financial Planner Board of Standards. These marks are awarded to
individuals who successfully complete the CFP Board's initial and
ongoing certification.
Certified Public Accountant (CPA)
A professional license granted by a state board of accountancy to
an individual who has passed the Uniform CPA Examination
(administered by the American Institute of Certified Public
Accountants) and has fulfilled that state's educational and
professional experience requirements for certification.
Charitable Lead Trust
A trust established for the benefit of a charitable organization
under which the charitable organization receives income from an
asset for a set number of years or for the trustor's lifetime.
Upon the termination of the trust, the asset reverts to the
trustor or to his or her designated heirs. This type of trust can
reduce estate taxes and allows the trustor's heirs to retain
control of the assets.
Charitable Remainder Trust
A trust established for the benefit of a charitable organization
under which the trustor receives income from an asset for a set
number of years or for the trustor's lifetime. Upon the
termination of the trust, the asset reverts to the charitable
organization. The trustor receives a charitable contribution
deduction in the year in which the trust is established, and the
assets placed in the trust are exempt from capital gains tax.
Chartered Financial Consultant
(ChFC)
A professional financial planning designation granted by The
American College (Bryn Mawr, PA) to individuals who complete a
comprehensive curriculum in financial planning. Prerequisites
include passing a series of written examinations, meeting
specified experience requirements and maintaining ethical
standards. The curriculum encompasses wealth accumulation, risk
management, income taxation, planning for retirement needs,
investments, estate and succession planning.
Chartered Life Underwriter (CLU)
A professional designation granted by The American College to
individuals who complete a comprehensive curriculum focused
primarily on risk management. Prerequisites include passing a
series of written examinations, meeting specified experience
requirements, and maintaining ethical standards. The curriculum
encompasses insurance and financial planning, income taxation,
individual life insurance, life insurance law, estate and
succession planning, and planning for business owners and
professionals.
COBRA
The Consolidated Omnibus Budget Reconciliation Act is a
federal law requiring employers with more than 20 employees to
offer terminated or retired employees the opportunity to continue
their health insurance coverage for 18 months at the employee's
expense. Coverage may be extended to the employee's dependents for
36 months in the case of divorce or death of the employee.
Coinsurance or Co-Payment
The amount an insured person must pay for a covered
medical and/or dental expense if his or her insurance doesn't
provide 100 percent coverage.
Commodities
The generic term for goods such as grains, foodstuffs, livestock,
oils, and metals which are traded on national exchanges. These
exchanges deal in both "spot" trading (for current delivery) and
"futures" trading (for delivery in future months).
Common Stock
A unit of ownership in a corporation. Common stockholders
participate in the corporation's profits or losses by receiving
dividends and by capital gains or losses in the stock's share
price.
Community Property
State laws vary, but generally all property acquired
during a marriage - excluding property one spouse receives from a
will, inheritance, or gift - is considered community property, and
each partner is entitled to one half. This includes debt
accumulated. There are currently nine community property states:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington, and Wisconsin.
Compound Interest
Interest that is computed on the principal and on the
accrued interest. Compound interest may be computed continuously,
daily, monthly, quarterly, semiannually, or annually.
Consumer Price Index
The U.S. Department of Labor's main indicator of inflation. The
Consumer Price Index is calculated each month from the cost of
some 400 retail items in urban areas throughout the United States.
Deduction
An amount that can be subtracted from gross income, from a gross
estate, or from a gift, thereby lowering the amount on which tax
is assessed.
Defined Benefit Plan
A qualified retirement plan under which a retiring
employee will receive a guaranteed retirement fund, usually
payable in installments. Annual contributions may be made to the
plan by the employer at the level needed to fund the benefit. The
annual contributions are limited to a specified amount, indexed
for inflation.
Defined Contribution Plan
A retirement plan under which the annual contributions
made by the employer or employee are generally stated as a fixed
percentage of the employee's compensation or company profits. The
amount of retirement benefits is not guaranteed; rather, it
depends upon the investment performance of the employee's account.
Diversification
Investing in different companies, industries, or asset
classes. Diversification may also mean the participation of a
large corporation in a wide range of business activities.
Dividend
A pro rata portion of earnings distributed in cash by a
corporation to its stockholders. In preferred stock, dividends are
usually fixed; with common shares, dividends may vary with the
fortunes of the company.
Dollar Cost Averaging
A system of investing in which the investor buys a fixed dollar
amount of securities at regular intervals. The investor thus buys
more shares when the price is low and fewer shares when it rises,
and the average cost per share is lower than the average price per
share. This strategy does not protect against loss in declining
markets and involves continuous investments, regardless of
fluctuating price levels.
Efficient
Frontier
A statistical result from the analysis of the risk and return for
a given set of assets that indicates the balance of assets that
may, under certain assumptions, achieve the best return for a
given level of risk.
Employer-Sponsored Retirement Plan
A tax-favored retirement plan that is sponsored by an employer.
Among the more common employer-sponsored retirement plans are
401(k) plans, 403(b) plans, simplified employee pension plans, and
profit-sharing plans.
Equity
The value of a person's ownership in real property or securities;
the market value of a property or business, less all claims and
liens upon it.
ERISA
The Employee Retirement Income Security Act is a federal
law covering all aspects of employee retirement plans. If
employers provide plans, they must be adequately funded and
provide for vesting, survivor's rights, and disclosures.
ESOP (employee stock ownership
plan)
A defined contribution retirement plan in which company
contributions must be invested primarily in qualifying employer
securities.
Estate Conservation
Activities coordinated to provide for the orderly and
cost-effective distribution of an individual's assets at the time
of his or her death. Estate conservation often includes wills and
trusts.
Estate Tax
Upon the death of a decedent, federal and state governments impose
taxes on the value of the estate left to others (with
limitations).
Executive Bonus Plan
The employer pays for a benefit that is owned by the executive.
The bonus could take the form of cash, automobiles, life
insurance, or other items of value to the executive.
Executor
A person named by the probate courts or the will to carry out the
directions and requests of the decedent.
Fixed
Income
Income from investments such as CDs, Social Security benefits,
pension benefits, some annuities, or most bonds that is the same
every month.
401(k) Plan
A defined contribution plan that may be established by a company
for retirement. Employees may allocate a portion of their salaries
into this plan, and contributions are excluded from their income
for tax purposes (with limitations). Contributions and earnings
will compound tax deferred. Withdrawals from a 401(k) plan are
taxed as ordinary income, and may be subject to an additional 10
percent federal tax penalty if withdrawn prior to age 59 ½.
403(b) Plan
A defined contribution plan that may be established by a nonprofit
organization or school for retirement. Employees may allocate a
portion of their salaries into this plan, and contributions are
excluded from their income for tax purposes (with limitations).
Contributions and earnings will compound tax deferred. Withdrawals
from a 403(b) plan are taxed as ordinary income, and may be
subject to an additional 10 percent federal tax penalty if
withdrawn prior to age 59 ½.
Fringe
Thing, part, or area of secondary or minor importance.
Fringe
Benefits
Employee benefit supplementing a wage or salary
Fundamental
Analysis
An approach to the stock market in which specific factors - such
as the price-to-earnings ratio, yield, or return on equity - are
used to determine what stock may be favorable for investment.
Gift Taxes
A federal tax levied on the transfer of property as a
gift. This tax is paid by the donor. The first $10,000 a year from
a donor to each recipient is exempt from tax. Most states also
impose a gift tax. The gift tax exemption is indexed annually for
inflation.
Holographic
Will
A will entirely in the handwriting of the testator. Without
witnesses, holographic wills are valid and enforceable only in
some states.
Index
A calculation that uses a selection of stocks or bonds to gauge a
certain market. The Dow Jones Industrial Average, for example, is
an index of 30 large industrial companies on the New York Stock
Exchange.
Individual Retirement Account (IRA)
Contributions to a traditional IRA - up to $2,000 per
year - are deductible from earned income in the calculation of
federal and state income taxes if the taxpayer meets certain
requirements. The earnings accumulate tax deferred until
withdrawn, and then they are taxed as ordinary income. Individuals
not eligible to make deductible contributions may make
nondeductible contributions, the earnings on which would be tax
deferred.
Inflation
An increase in the price of products and services over time. The
government's main measure of inflation is the Consumer Price
Index.
Intestate
The condition of an estate left by a decedent without a
valid will. State law then determines who inherits the property or
serves as guardian for any minor children.
Investment Category
A broad class of assets with similar characteristics. The five
investment categories include cash equivalents, fixed principal,
equity, debt, and tangibles.
Irrevocable Trust
A trust that may not be modified or terminated by the trustor
after its creation.
Joint and
Survivor Annuity
Most pension plans must offer this form of pension plan payout
that pays over the life of the retiree and his or her spouse after
the retiree dies. The retiree and his or her spouse must
specifically choose not to accept this payment form.
Joint Tenancy
Co-ownership of property by two or more people in which the
survivor(s) automatically assumes ownership of a decedent's
interest.
Jointly Held Property
Property owned by two or more persons under joint
tenancy, tenancy in common, or, in some states, community
property.
Keogh Plan
This retirement plan, named for Eugene Keogh, is designed
for self-employed individuals. Up to $30,000 or 25 percent of
self-employed income (whichever is less) may be deducted from
compensation and set aside into the plan.
Liability
Any claim against the assets of a person or corporation:
accounts payable, wages, and salaries payable, dividends declared
payable, accrued taxes payable, and fixed or long-term obligations
such as mortgages, debentures, and bank loans.
Limited Partnership
Limited partnerships pool the money of investors to develop or
purchase income-producing properties. When the partnership
subsequently receives income from these properties, it distributes
the income to its investors as dividend payments.
Liquidity
The ease with which an asset or security can be converted into
cash without loss of principal.
Living Trust
A trust created by a person during his or her lifetime.
Lump-Sum Distribution
The disbursement of the entire value of a profit-sharing plan,
pension plan, annuity, or similar account to the account owner or
beneficiary. Lump-sum distributions may be rolled over into
another tax-deferred account.
Marginal
Tax Bracket
The range of taxable income that is taxable at a certain rate.
Currently, there are five marginal tax brackets: 15 percent, 28
percent, 31 percent, 36 percent, and 39.6 percent.
Marital Deduction
A provision of the tax codes that allows all assets of a deceased
spouse to pass to the surviving spouse free of estate taxes. This
provision is also referred to as the unlimited marital deduction.
Money Market Fund
A mutual fund that specializes in investing in short-term
securities and that tries to maintain a constant net asset value
of $1.
Municipal Bond
A debt security issued by municipalities. The income from
municipal bonds is usually exempt from federal income taxes. In
many states, it is also exempt from state income taxes in the
state in which the municipal bond is issued.
Municipal Bond Fund
A mutual fund that specializes in investing in municipal bonds.
Mutual Fund
A collection of stocks, bonds, or other securities purchased and
managed by an investment company with funds from a group of
investors.
Net Asset
Value
The price at which a mutual fund sells or redeems its shares. The
net asset value is calculated by dividing the net market value of
the fund's assets by the number of outstanding shares.
Pooled
Income Fund
A trust created by a charitable organization that
combines the contributions of several donors and distributes
income to those donors based on the earnings of the trust. The
trust is managed by the charitable organization, and contributions
are partially deductible for income tax purposes.
Portfolio
All the investments held by an individual or a mutual fund.
Preferred Stock
A class of stock with claim to a company's earnings,
before payment can be made on the common stock, and that is
usually entitled to priority over common stock if the company
liquidates. Generally, preferred stocks pay dividends at a fixed
rate.
Prenuptial Agreement
A legal agreement arranged before marriage stating who owns
property acquired before marriage and during marriage and how
property will be divided in the event of divorce. ERISA benefits
are not affected by prenuptial agreements.
Price/Earnings Ratio (P/E Ratio)
The market price of a stock divided by the company's annual
earnings per share. Because the P/E ratio is a widely regarded
yardstick for investors, it often appears with stock price
quotations.
Principal
In a security, the principal is the amount of money that is
invested, excluding earnings. In a debt instrument such as a bond,
it is the face amount.
Probate
The court-supervised process in which a decedent's estate is
settled and distributed.
Profit-Sharing Plan
An agreement under which employees share in the profits of their
employer. The company makes annual contributions to the employees'
accounts. These funds usually accumulate tax deferred until the
employee retires or leaves the company.
Prospectus
A document provided by mutual fund companies to prospective
investors. The prospectus gives information needed by investors to
make informed decisions prior to investing in a specific mutual
fund. The prospectus includes information on the minimum
investment amount, the fund's objectives, past performance, risk
level, sales charges, management fees, and any other expense
information about the fund, as well as a description of the
services provided to investors in the fund.
Qualified
Domestic Relations Order (QDRO)
At the time of divorce, this order would be issued by a state
domestic relations court and would require that an employee's
ERISA retirement plan accrued benefits be divided between the
employee and the spouse.
Qualified Retirement Plan
A pension, profit-sharing, or qualified savings plan that is
established by an employer for the benefit of the employees. These
plans must be established in conformity with IRS rules.
Contributions accumulate tax deferred until withdrawn and are
deductible to the employer as a current business expense.
Revocable
Trust
A trust in which the creator reserves the right to modify or
terminate the trust.
Risk
The chance that an investor will lose all or part of an
investment.
Risk-Averse
Refers to the assumption that rational investors will
choose the security with the least risk if they can maintain the
same return. As the level of risk goes up, so must the expected
return on the investment.
Rollover
A method by which an individual can transfer the assets
from one retirement program to another without the recognition of
income for tax purposes. The requirements for a rollover depend on
the type of program from which the distribution is made and the
type of program receiving the distribution.
Roth IRA
A nondeductible IRA that allows tax-free withdrawals when certain
conditions are met. Income and contribution limits apply.
Security
Evidence of an investment, either in direct ownership (as
with stocks), creditorship (as with bonds), or indirect ownership
(as with options).
Simplified Employee Pension Plan
(SEP)
A type of plan under which the employer contributes to an
employee's IRA. Contributions may be made up to a certain limit
and are immediately vested.
Single-Life Annuity
An insurance-based contract that provides future payments at
regular intervals in exchange for current premiums. Generally used
as a supplement to retirement income and pays over the life of one
individual, usually the retiree, with no rights of payment to any
survivor.
Split-Dollar Plan
An arrangement under which two parties (usually a
corporation and employee) share the cost of a life insurance
policy and split the proceeds.
Spousal IRA
An IRA designed for a couple when one spouse has no
earned income. The maximum combined contribution that can be made
each year to an IRA and a spousal IRA is $4,000 or 100 percent of
earned income, whichever is less. This total may be split between
the two IRAs as the couple wishes, provided the contribution to
either IRA does not exceed $2,000.
Tax Bracket
The range of taxable income that is taxed at a certain rate.
Brackets are expressed by their marginal rate.
Tax Credit
Tax credits, the most appealing type of tax deductions, are
subtracted directly, dollar for dollar, from your income tax bill.
Tax Deferred
Interest, dividends, or capital gains that grow untaxed in certain
accounts or plans until they are withdrawn.
Tax-Exempt Bonds
Under certain conditions, the interest from bonds issued by
states, cities, and certain other government agencies is exempt
from federal income taxes. In many states, the interest from
tax-exempt bonds will also be exempt from state and local income
taxes.
Taxable Income
The amount of income used to compute tax liability. It is
determined by subtracting adjustments, itemized deductions or the
standard deduction, and personal exemptions from gross income.
Technical Analysis
An approach to investing in stocks in which a stock's past
performance is mapped onto charts. These charts are examined to
find familiar patterns to use an an indicator of the stock's
future performance.
Technology
Study or use of the mechanical arts and applied sciences.
Tenancy in Common
A form of co-ownership. Upon the death of a co-owner, his or her
interest passes to his or her chosen beneficiaries and not to the
surviving owner or owners.
Term Insurance
Term life insurance provides a death benefit if the insured dies.
Term insurance does not accumulate cash value and ends after a
certain number of years or at a certain age.
Testamentary Trust
A trust established by a will that takes effect upon
death.
Testator
One who has made a will or who dies having left a will.
Total Return
The total of all earnings from a given investment, including
dividends, interest, and any capital gain.
Trust
A legal entity created by an individual in which one
person or institution holds the right to manage property or assets
for the benefit of someone else. Types of trusts include:
Testamentary Trust - A trust established by a will that takes
effect upon death; Living Trust - A trust created by a person
during his or her lifetime; Revocable Trust - A trust in which the
creator reserves the right to modify or terminate the trust;
Irrevocable Trust - A trust that may not be modified or terminated
by the trustor after its creation
Trustee
An individual or institution appointed to administer a trust for
its beneficiaries.
Trustee-to-Trustee Transfer
A method of transferring retirement plan assets from one
employer's plan to another employer plan or to an IRA. One benefit
of this method is that no federal income tax will be withheld by
the trustee of the first plan.
Unified
Credit
A credit that may be applied against an individual's gift or
estate taxes. The unified credit will increase in gradual steps
until it eventually exempts an estate valued up to $1,000,000 from
federal estate taxes in 2006.
Universal Life Insurance
A type of life insurance that combines a death benefit with a
savings element which accumulates tax deferred at current interest
rates. Under a universal life insurance policy, the policyholder
can increase or decrease his or her coverage, with limitations,
without purchasing a new policy.
Variable
Universal Life Insurance
A type of life insurance that combines a death benefit
with a savings element that accumulates tax deferred at current
interest rates. Under a variable universal life insurance policy,
the cash value in the policy can be placed in a variety of
subaccounts with different investment objectives. The policyholder
can transfer funds among the subaccounts as he or she wishes. Fees
are charged after a certain number of transfers.
Volatility
The range of price swings of a security or market over
time.
Welfare
Benefit Plan
An employee benefit plan that provides such benefits as
medical, sickness, accident, disability, death, or unemployment
benefits.
Whole Life Insurance
A type of life insurance that offers a death benefit and also
accumulates cash value, tax deferred at fixed interest rates.
Whole life insurance policies generally have a fixed annual
premium that does not rise over the duration of the policy. Whole
life insurance is also referred to as "ordinary" or "straight"
life insurance.
Will
A legal document that declares a person's wishes concerning the
disposition of property, the guardianship of his or her children,
and the administration of the estate after his or her death.
Yield
In general, the yield is the amount of current income
provided by an investment. For stocks, the yield is calculated by
dividing the total of the annual dividends by the current price.
For bonds, the yield is calculated by dividing the annual interest
by the current price. The yield is distinguished from the return,
which includes price appreciation or depreciation.
Zero-Coupon
Bond
This type of bond makes no periodic interest payments but instead
is sold at a steep discount from its face value. Bondholders
receive the face value of their bonds when they mature.
