Life Hacks

An investment account used to earmark funds for college. Funds invested in a 529 account grow tax-free if used for college expenses, including tuition and room and board. Funds withdrawn that are not applied to college costs are subject to income tax and a 10% tax penalty on earnings.

A financial institution that has a legal responsibility for a customer’s securities. Custodians are responsible for the reporting of accounts as well as safekeeping.

An account opened by an investor with a licensed brokerage firm. A brokerage account allows the account owner to place investment orders that are carried out by the broker dealer on the owner’s behalf. Brokerage accounts can be titled as IRAs, individual accounts, trust accounts, corporate accounts, etc.

A financial product sold by an insurance company that may provide fixed or variable growth and/or fixed or variable income.

An investment account managed by a professional through which the investor directly owns individual securities (stocks or bonds). This differs from a mutual fund in which an investor owns a share of a pool of securities.

“Transfer on Death” TOD is used to name a beneficiary for non-retirement accounts. TOD allows the account owner to name the person (or persons) that will receive the account in the event of death. TOD designation is used to avoid probate.

An account used by individuals to earmark funds for retirement. Contributions are not tax deductible, however contributions and earnings may grow tax-free. Tax-Free withdraws are permitted on accounts opened for at least 5 years and the owner is at least 59.5.

“Individual Retirement Account”. An account used to earmark funds for retirement. Contributions are generally made on a pre-tax basis and earnings grow tax-deferred (not taxed until withdrawn). Annual contribution limits apply and a 10% tax penalty applies if funds are withdrawn before age 59 ½.

A retirement plan established by an employer to which eligible employees may contribute through salary deferrals (i.e. paycheck deductions) on a pre-tax or post-tax basis. Annual contribution limits are set by the IRS.

An imaginary portfolio that represents a particular market or piece of a market. Indexes may be used to compare the performance of an investor’s portfolio to an appropriate benchmark.

The mix of investment types within a portfolio (i.e. stocks, bonds and cash). The appropriate mix for an investor is determined by their timeframe, risk tolerance and financial situation.

A technique used to manage risk by investing in a variety of investments with the expectation that positive performance by some will offset negative performance of others.

Distributions of company earnings to its shareholders.

The interest paid by a bond issuer (i.e. corporation) to a bond buyer.

An investment vehicle similar a mutual fund but can be traded like stock during market hours. The stocks or bonds within the fund mirror that of a pre-defined index.

An investment vehicle made up of a pool of funds from many investors. These funds are used to buy stocks and/or bonds chosen by the fund manager who is required to buy in accordance with the fund’s objectives as stated in its prospectus. Mutual funds are traded once a day at the close of the market.

A loan to corporations or governments in exchange for a fixed interest payment until maturity. Bonds are also referred to as “fixed income.”

A piece of ownership in a public company. Stocks may also be referred to as “equities.”

An agreement between two parties in which one allows the other to rent property in exchange for regular payments for a period of time.

“Annual Percentage Rate.” The annual rate that is charged for borrowing money (or paid for investing money).

A resource or property that is expected to provide a benefit. Examples of assets include cars, jewelry, equipment, land and any other item of value.

An individual or corporation’s debts or obligations. Individual liabilities may include a home mortgage, car loan or student loans. A corporation’s liabilities may include outstanding payments owed to vendors (accounts payable) or bond interest and principal payments.

The process of paying off debt in regular payments over a period of time.

The securities held by an investor. Securities may include stocks, bonds, mutual funds, etf’s, money markets and others.

Interest that accrues on the initial principal only. For example, if the initial investment is $100 and the annual rate of interest is 3%, $3 of interest will be paid each year.

Interest that accrues on the initial principal and on the interest accrued previously. For example, if the initial principal balance is $100 and the annual rate of interest is 3%, the first year’s interest will accrue on $100. The second year’s interest will accrue on $103.

The rate at which the price of goods and services increases.

The person designated to receive assets in the event of the owner.

The legal process through which a will is reviewed and an estate is administered by the court. Because of the costs of court involvement, many people try to avoid probate through the use of a living trust.

A legal declaration of how a person’s assets should be distributed at death. Since a will is subject to probate, it is recommended that a living trust is used instead. When a trust is in place, the primary function of a will is to establish guardianship for minor children.

“Irrevocable Life Insurance Trust.” An ILIT is an irrevocable trust setup with a life insurance policy as the asset. ILITs are used to reduce estate taxes since it removes the value of the life insurance from the insured’s estate.

In community property states, property acquired by either spouse during the course of marriage is considered community property, or undivided one-half interest for each spouse.

“Qualified Domestic Relations Order.” A type of court order, typically found in divorce agreements, that acknowledges that an ex-spouse is entitled to a portion of the individual’s retirement account. The purpose of this order is to ensure that the retirement is divided without undue income tax liability.

An agreement made during life that allows an individual to provide instructions for assets upon their death. A living trust is used to ensure that assets are passed as desired, reduce estate taxes and/or avoid costs of probate.

“Required Minimum Distribution.” This is the withdrawal amount required by the IRS starting at age 70 1/2 and every year thereafter. RMDs apply to Traditional or Rollover IRAs, SEP IRAs, SIMPLE IRAs and employer retirement plans (i.e. 401k, 403b). The purpose of the RMD is for the account holder to pay income tax.

A stipulation that, should a beneficiary die before the account owner, the beneficiary’s share will pass to his/her heirs & not the other named beneficiary. Ex: Martha’s son & daughter are named equal beneficiaries, then both Martha & her daughter die. Per Stirpes ensures Martha’s daughter’s share passes to her kids, not her brother.