What does it all mean?

When looking into retirement options it may feel as if financial advisors are speaking a different language at times. To help, we have compiled a glossary of key financial terms that may help you cut through some of the clutter.


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Glossary of Common Retirement Terms:


Browse the key terms below to better familiarize yourself with retirement terms.

Accrued Benefit

The amount of benefit will be provided to a participant in a defined benefit plan when that participant reaches the normal retirement age.

Annual Minimum Contributions

The amount an employer must contribute to the retirement plan on behalf of an employee, which varies depending on the type of plan.

Annuitant

An individual who receives payment from an annuity.

Annuity

A contract or agreement with an insurance or investment company that provides a source of income or series of payments from the investment, either now or at a set future date, such as retirement.

Balance Sheet

A financial statement that is divided into three major parts: assets, liabilities, and shareholder's equity.

Basis

An amount usually representing the actual cost of an investment to the buyer. The basis amount is important in calculating capital gains and losses, depreciation, and other income tax calculations.

Beneficiary

The person who is designated to receive the benefits of a contract.

Benefit

The amount and method of payment a plan will pay to an employee or his or her beneficiary upon the occurrence of some event described in the plan, like retirement, disability of death.

Catch-up Contributions

Plans that allow employees to contribute to their own retirement may permit employees age 50 or older at the end of the calendar year to make additional (catch-up) contributions to plans. Amount of the catch-up contributions depend on the type of plan.

Contribution Limits

The law limits the amount that can be contributed annually to a plan for an employee. The limits differ depending upon the type of plan and upon whether it is the employer or the employee who is contributing.

Cover

The law requires an employer who has a retirement plan to enroll employees who meet certain requirements. The eligibility requirements vary by type of plan. An employer may use less restrictive eligibility requirements than those legally required.

Coverage tests

The law requires certain plans to meet annual tests to ensure that plans do not disproportionately benefit the business’ owners and highly compensated employees.

Deferred Annuity

A deferred annuity is established by paying one or more premiums over a period of time and allows assets to grow tax-deferred before being converted to payments.

Design flexibility

Although certain terms for retirement plans are legally required, an employer can have other optional terms and provisions permitted for that type of plan.

Employer contributions

Money deposited by an employer into the plan for the benefit of plan participants.

Equity-Indexed Annuity

An equity-indexed annuity, either immediate or deferred, earns interest or provides benefits that are linked to an external equity index, such as Standard and Poor's 500 Composite Stock Price Index.

Final average pay

A number of months or years, as specified in a defined benefit plan, used to determine an employee’s average salary, which in turn determines the amount of benefits the participant will receive.

Hardship withdrawals

Certain plans may allow employees to withdraw money from the plan while still employed to relieve an immediate and heavy financial need of the employee, dependent or beneficiary. Amount withdrawn can't be more than necessary to satisfy the financial need.

Highly compensated employees

An individual who owned more than 5% of the employer business at any time during the year or the preceding year or received compensation for the preceding year of more than an annually adjusted amount.

Includible compensation

Generally, for 403(b) and 457(b) plans, this is the amount of includible income and benefits that a participant receives from the employer who maintains the retirement plan and that must be included in the participant's income.

Loans

If permitted by the plan, amount that an employee may borrow from the plan but must repay along with stated interest.

Matching contribution

The amount an employer deposits to the plan for a plan participant that equals some portion (usually percentage) of an employee's contributions.

Operate

Generally means running the plan in accordance with its written terms, filing any required returns, performing required tests and updating the plan so that it conforms to any changes in the law.

Payroll deduction

The amount an employee chooses to have the employer deduct from his or her wages to deposit to a retirement plan.

Pre-approved plan

The plan document, for some types of plans, sold by institutions or practitioners that has been approved in form by the IRS as meeting that plan type's basic legal requirements.

Salary deferrals

The amount an employee can choose to have the employer deduct from his or her pay for contribution into a retirement plan that permits employee contributions. The amount an employee can defer varies by type of plan and is subject to annual limits.

Set up

The process to establish a plan. Generally adopting a plan document (model form, pre-approved or individually drafted) and setting up an account(s) or trust to receive deposited money. 403(b) plans require written program but not a single plan document.

Vesting

The portion of retirement benefits owned by the employee and no longer at risk of being forfeited. Plan must state the yearly percentage the employee is vested in his or her retirement benefits. Employee contributions must be immediately vested.