Retirement Investment Terms
A defined contribution plan that allows employees to contribute pre-tax dollars through salary deferral. Many plans offer a variety of investment options—including stocks, bonds, short-term reserves, mutual funds, and company stock—and employers often match a percentage of employee contributions. 401(k) savings grow tax deferred until retirement (or early withdrawal, in which case a penalty tax applies).
Tax-sheltered retirement plans available to employees of government agencies and nonprofit organizations such as hospitals and universities. A 403(b) account is established by an individual and is similar to an individual retirement account (IRA). A 403(b)(7) plan is offered by the employer and allows workers to contribute pretax dollars to selected investments.
Defined benefit plan
A retirement plan that promises to pay a certain amount, usually based on the number of years of service and on the average salary in the period before retirement. Employers generally bear all investment risk.
Defined contribution plan
A retirement plan offering a benefit that depends on the total contributions made by the employer and the employee, and on the investment returns earned by those contributions. Employees generally bear the investment risk.
The strategy of investing in different asset classes and among the securities of many issuers in an attempt to lower overall investment risk.
A payment of cash or stock from a company's earnings to each stockholder as declared by the company's board of directors.
A technique of investing equal amounts of money at regular intervals on an ongoing basis, which enables investors to reduce the short-term impacts of market highs and lows.
Early withdrawal penalty
A penalty on money withdrawn early from a fixed-term investment. For example, cashing in a certificate of deposit (CD) before its maturity.
Full retirement age
The age at which a working American is eligible to begin receiving full Social Security retirement benefits—traditionally age 65. However, because of projected shortfalls in benefits, the age has been increased in increments for those born in 1938 or later. For those born after 1959, full retirement age is 67.
Money withdrawn from an employer-sponsored retirement plan or IRA to cover an immediate need such as unforeseen medical expenses, a first-time home purchase, higher education or tuition costs, expenses to prevent eviction or a foreclosure, funeral expenses, or to repair damage to a principal residence caused by an unusual event such as a hurricane, tornado, or other natural disaster. Provisions for what expenses qualify for a hardship withdrawal can vary from plan to plan. Hardship withdrawals are subject to federal and state taxes and, if taken before age 59½, may be subject to a 10% federal penalty tax. Please contact a tax advisor for more detailed tax information on hardship withdrawals from an employer-sponsored retirement plan or IRA.
An investment company that pools the money of many shareholders and invests it in a variety of securities in an effort to achieve a specific objective over time.
Normal retirement age
The age at which a participant in Social Security or a private pension plan is eligible for full retirement benefits.
A federal tax that can be applied if a plan account holder does not meet certain requirements when making withdrawals from a tax-advantaged retirement plan (for instance, if the plan holder has not reached age 59-1/2). This penalty tax is owed in addition to any income taxes due.
An arrangement under which an employer—and sometimes the employee—makes payments toward retirement, disability, or death benefits for employees who meet certain criteria. Types of pension plans include defined benefit plans, defined contribution plans, employee stock ownership plans, money purchase plans, profit-sharing plans, stock bonus plans, thrift plans, and target benefit plans.
A traditional IRA holding money from a qualified plan, 457 plan, or 403(b) plan. These assets can later be rolled over to another qualified plan. Also known as a conduit IRA.
A nondeductible IRA introduced by the Taxpayer Relief Act of 1997. Distributions from a Roth IRA are tax-free if they meet certain requirements (income, time since the Roth IRA was established, age of the Roth IRA owner, etc.).
Social Security retirement benefits
Monthly government payments to retired workers or their families who have paid Social Security taxes for a total of 40 quarters or 10 years.
Dividends, interest, and unrealized capital gains on investments in an account such as a qualified retirement plan, or IRA where income is not subject to taxation until a withdrawal is made.
Tax-deferred retirement plan
Any retirement plan in which earnings are not currently taxable.
The right an employee acquires—typically through years of service to an organization—to receive any contributions an employer makes to his or her account. Account holders are always fully vested in their own contributions.