Does financial jargon make your eyes glaze over? Below is a list of "user-friendly" definitions for commonly used financial terms:
AGI (Adjusted Gross Income) - the last line on the front page of IRS form 1040, indicating income before personal exemptions, deductions, and credits are taken.
Asset Allocation - the placement of a certain amount of one's investment capital within different types of asset classes (e.g., 50% stock, 30% bonds, and 20% cash).
Beneficiary - individual(s) identified to inherit specific property (e.g., beneficiaries are named on an insurance policy and retirement savings plans such as an IRA).
Before- (Pre-) Tax Dollars - money contributed to a tax-deferred savings plan (e.g., 401(k)) that you do not have to pay income tax on until withdrawal at a future date.
Capital Appreciation - an increase in the market value of an investment.
Capitalization - market value of a company, calculated by multiplying the number of shares outstanding by the price per share. Often referred to as "cap," as in a "large cap stock."
CD - certificate of deposit, sold by banks with principal insured by the Federal Deposit Insurance Corporation (FDIC). Brokerage firms may also sell CDs.
Compound Interest - interest credited daily, monthly, quarterly, semi-annually, or annually on both principal and previously credited interest.
Contribution - a voluntary deposit to a retirement plan such as a 401(k) or IRA.
Conversion - the transfer of funds from a traditional IRA to a Roth IRA. IRA conversions are a taxable event.
Direct Transfer - movement of retirement funds from one qualified retirement plan directly to another qualified plan without the owner taking possession of the funds.
Dividend - a distribution of income from investments to shareholders.
Earned Income - wages and salaries from a job or net earnings from self-employment. Earned income does not include pension income or interest and dividends on investments.
Index - an unmanaged collection of securities whose overall performance is used as an indication of stock or bond market trends. An example of an index is the widely quoted Dow Jones Industrial Average. Another frequently reported index is the Standard & Poor's 500.
Marginal Tax Rate - the rate that you pay on the last (highest) dollar of personal or household (if married) earnings. As a result of the May 2003 tax law, there are currently six federal marginal tax rates: 10%, 15%, 25%, 28%, 33%, and 35%.
Ordinary Income - current income from various sources that is subject to standard marginal tax rates. Ordinary income includes salary/wages, net income from a business, dividends, and interest and capital gains that are reported on 1099 statements.
Penalty - additional tax due when conditions of retirement savings plan are not fulfilled. An example is the 10% penalty for early withdrawals before age 59½. Late withdrawals (i.e., not making minimum required distributions after age 70½) from a traditional IRA or 401(k) plan are another example of an instance when penalties are assessed.
Rollover - transfer of funds from a retirement savings plan, such as a 401(k) or 403(b), to a traditional IRA. The term is also used for changes from one type of IRA investment to another. If done properly, according to tax law, rollovers are a non-tax able event.
Securities - A term used to refer to stocks and bonds (e.g., tax-exempt securities) in general.