Sometimes it seems like you need an economics degree to understand financial lingo. Here’s a short glossary of five terms that may be important as you make decisions about your financial future.
401(k): A 401(k) is the most common employee-sponsored retirement plan. It allows employees to take a set amount or percentage of their paycheck and put it in a retirement savings account. Many employers agree to match a certain percentage of their employee’s contributions. These contributions are usually invested in stocks or bonds to hopefully generate more revenue.
Why you should care: A 401(k) lets you invest pre-tax money for retirement. With more funds to grow, you’ll have a larger fund for your retirement.
529 Plan: The 529 Plan is designed to save for college and is supported by states or educational institutions. There are two types: Pre-paid tuition and college savings plan. All 50 states sponsor at least one of the types.
WHY YOU SHOULD CARE: The 529 Plan offers tax advantages and in some cases other incentives that can let your money go farther to pay for college.
Mutual Fund: Mutual funds pool money from different investors to invest in stocks, bonds, money market accounts, and other assets. The combination of these assets is invested in a portfolio. A money manager is responsible for investing the fund’s money in the best opportunities to produce the highest capital gains.
Why you should care: Mutual funds can help diversify your investments, potentially lowering risk and providing greater returns.
Traditional IRA: This individual retirement account allows you to put off paying taxes on your contributions from each paycheck into this account until you begin making withdrawals during retirement.
Why you should care: Contributions grow tax deferred and you can take withdrawals in later years to reduce your tax liability.
Roth IRA: A Roth IRA is an individual retirement plan (a type of qualified retirement plan) that bears many similarities to the traditional IRA. The biggest distinction between the two is how they’re taxed.
You make contributions with after-tax dollars, but when you make withdrawals during retirement, the qualified withdrawals are tax-free.
Why you should care: Any gains on your Roth IRA account are yours completely tax-free after age 59 and a half.