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A Guide to Financial Planning: Glossary of Terms

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Individual Retirement Account (IRA)

Roth IRA contributions are made with after-tax assets; all transactions within the IRA have no tax impact; and withdrawals are usually tax-free. Named for Sen. William V. Roth Jr., the Roth IRA was introduced as part of the Taxpayer Relief Act of 1997.

 

Traditional IRA 

Contributions are often tax-deductible (often simplified as money is deposited before taxes, or contributions are made with pre-tax assets), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a deductible IRA or a non-deductible IRA.

 

SEP IRA    

A provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a traditional IRA established in the employee’s name, instead of to a pension fund in the company’s name.

 

SIMPLE IRA    

A Savings Incentive Match Plan for Employees that requires employer matching contributions to the plan whenever an employee makes a contribution. The plan is similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately.

 

Mutual Fund

A professionally managed, pooled investment vehicle in which an investor will own shares of the fund. No direct ownership of underlying investments. Mutual Funds come in three major share classes:

• A Share

When you buy Class A shares with a front-end sales charge, a portion of your dollars is not invested. Class A shares may impose an asset-based sales charge (often 0.25 percent per year), but it generally is lower than the charge imposed by the other classes.

A mutual fund may offer discounts—called break points—on the front-end sales charge if you:

-Make a large purchase;

-Already hold other mutual funds offered by the same fund family;

-Commit to regularly purchasing the mutual fund’s shares.

 

• B Share

Class B shares typically do not require a front-end sales charge, but do impose asset-based sales charges that may be higher than those you would pay if you purchased Class A shares. Class B shares impose a contingent deferred sales charge, which you’d pay if you sold your shares within a certain period, often six years.

The CDSC normally declines the longer you hold your shares and, eventually, is eliminated. Within two years after the CDSC is eliminated, Class B shares often “convert” into lower-cost Class A shares. When they convert, they begin to charge the same fees as Class A shares. Unlike Class A purchases, all of your dollars are immediately invested. But your annual expenses, as measured by the expense ratio, may be higher. You also may pay a sales charge when you sell your Class B shares. If you intend to purchase a large amount of Class B shares, you may want to discuss with your financial adviser whether Class A shares would be preferable.

 

• C-Share

Class C shares do not impose a front-end sales charge on the purchase, so the full dollar amount that you pay is invested. Often Class C shares impose a small charge (often 1 percent) if you sell your shares within a short time, usually one year. They impose higher asset-based sales charges than Class A and B shares and, since they generally do not convert into Class A shares, those fees will not be reduced over time. Additionally, in most cases, your total cost would be higher than with Class A shares, and even Class B shares, if you hold for a long time. C shares are more suitable for shorter holding periods.

 

Exchange Traded Fund (ETF)

A non-managed, pooled investment vehicle, usually built to replicate an index (S&P 500, Dow Jones Industrial Average, etc.). Typically much lower expense ratio than a mutual fund. Unlike mutual funds, they trade daily like a stock. Involve commissions to buy and sell.

 

Term Life Insurance    

Lowest cost type of life insurance. Typically purchased for a set term of years.

 

Advisory Account:

This type of account can typically hold stocks, bonds, mutual funds, and ETFs. Instead of paying commissions or loads, you pay an annual fee based on the level of assets in the account. This fee is typically paid quarterly. In addition you may pay other fees, like management fees, and the expense ratios of the underlying investments.

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