A
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.
B
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.
C
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
PLANNER® 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. CFP®, CERTIFIED
FINANCIAL PLANNER® 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.
D
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.
E
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.
F
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.
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.
G
Gift Taxes
A federal tax levied on the
transfer of property as a gift.
This tax is paid by the donor.
The first $12,000 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.
H
Holographic Will
A will entirely in the
handwriting of the testator.
Without witnesses, holographic
wills are valid and enforceable
only in some states.
I
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 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.
J
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.
K
Keogh Plan
This retirement plan, named for
Eugene Keogh, is designed for
self-employed individuals. Up to
$45,000 of self-employed income
may be deducted from
compensation and set aside into
the plan.
L
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 longterm
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.
M
Marginal Tax Bracket
The range of taxable income that
is taxable at a certain rate.
Currently, there are six
marginal tax brackets: 10
percent, 15 percent, 25 percent,
28 percent, 33 percent, and 35
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.
N
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.
O
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.
Q
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.
R
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.
S
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 $8,000 (in 2007)
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
$4,000.
T
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 as an indicator
of the stock’s future
performance.
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.
U
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.
V
Variable Universal
Life Insurance
A type of life insurance that
combines a death benefit with a
savings element that accumulates
tax deferred. 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.
W
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.
X
Y
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.
Z
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.
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