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Glossary For Financial Planning

Here are some terms and definitions that you might find helpful.

401 (k) 

A company retirement plan that allows you to delay paying income tax on your earnings until a future date when you take it out of the 401 (k) to spend.

401 (k) Roth

A company retirement plan where your contributions are taxed before going into the plan and will grow tax-free. Note: if you receive a company-match to your contribution it will remain pre-tax until you take it out to spend.  

403 (b)

A retirement account for certain employees of public schools and tax-exempt organizations. Participants include teachers, school administrators, professors, government employees, nurses, doctors, and librarians.

403 (b) Roth

A company retirement plan where you contribute after tax dollars that will grow tax-free. Note: if you receive a company-match your contribution it will remain pre-tax until you take it out to spend.  


This is what you own or the stuff you have. A common trait is that an asset can usually be sold for money. Common examples of personal assets include cash and cash equivalents, certificates of deposit, checking, and savings accounts, money market accounts, physical cash, Treasury bills, real estate, and personal belongings.

Brokerage Company

A brokerage company is the middleman between the buyer and seller for investments such as stocks, bonds, and mutual funds. Brokerage companies typically receive compensation by means of commissions or fees that are charged once the transaction has successfully completed.

Brokerage Commission

The amount paid for a buy-or-sell transaction.

Brokerage Fee

Usually a percentage paid on the total account size, not on the amount of a transaction.

Certificate of Deposit

An account at a bank or credit union that you can lock away a portion of your money for a period of time in exchange for a higher interest rate than a savings account. Usually, a CD will have a penalty for early withdrawal.


A formal recognition of expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement (such as with 401(k)s). Owned and awarded by the Certified Financial Planner Board of Standards, Inc. (CFP Board), the designation is awarded to individuals who successfully complete the CFP Board's initial exam, experience, then continue ongoing annual education programs to sustain their skills and certification.

Death Benefit

Usually stipulates who receives the money after you die. A transfer of value or ownership to the beneficiary when an owner or annuitant dies.


A promise to pay an amount to a person or company over time or in the future. Debt increases your current amount of purchasing power by reducing the amount of your future assets or income.

Discretionary Fee

The amount paid for buy-and-sell decisions to be made by an investment manager on behalf of the account owner.

Discretionary Management

A “done for you” service. Everything is done on your behalf instead of you approving each purchase and sale ahead of time. This is only available in fee accounts, not commission.

Emergency Money

A readily available source of money for unexpected expenses or loss of income. It smooths out the financial bumps in the road and reduces the need to borrow money.


A person or organization that acts on behalf of another person or persons, putting their clients' interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other's best interests.

Financial Planner

Anyone who helps someone with financial goals, determining their risk tolerance, determining suitable investments, life insurance, and generally planning out anyone’s financial future. Anyone can call themselves a financial planner, but a CERTIFIED FINANCIAL PLANNER™ has proven their knowledge by passing an exam.

Fixed Annuity

An account at an insurance company that pays an interest rate for a specific period of time. Most fixed annuities usually have a portion of the money available without penalty during that time period. The insurance company does guarantee the safety of the money from loss. A type of insurance contract that promises to pay the buyer an interest rate on their account balance.

Gross Income

The individual's total income before taxes or other deductions.


Money received for work or from investment activities that covers day-to-day expenses. Retirees primarily use investments, pensions and Social Security for their sources of income. Most forms of income are subject to taxation.

Income Tax

A type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations.

Independent Agent

An insurance agent that sells insurance policies provided by several different insurance carriers, rather than just a single insurance company. The independent agent acts as a middleman to connect insurance buyers and sellers in order to facilitate a transaction.


An increase in prices and decline in purchasing power of money over time.

Interest Rate

The proportion of a loan that a lender charges to the borrower for the use of assets, usually expressed as an annual percentage of the principal.

Individual Retirement Account (IRA)

A tax-advantaged investing tool that individuals use to save funds for retirement. There are several types of IRAs.

  • Traditional IRAs
  • Roth IRAs
  • SEP IRAs

Legacy Planning

A financial strategy intended to determine who you will leave your money and other assets to when you die.  


Using borrowed capital for an investment with the intention of earning a greater potential return. Leverage can also refer to the amount of debt a firm uses to finance assets.


These are the things you owe. Common examples of liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses.

Mutual Funds

A type of investment fund made up of a pool of money collected from shareholders and managed by professionals to invest in securities like stocks, bonds, money market instruments, and other assets.

Net Worth

The total wealth of an individual or company determined by subtracting the value of the liabilities they owe from the value of the assets a person or corporation owns.

Prime Brokerage

A bundled group of services that investment banks and other financial institutions offer to hedge funds and other large investment clients that need to be able to borrow securities or cash in order to engage in netting to achieve absolute returns. The services provided under prime brokering include securities lending, leveraged trade executions, and cash management, among other things.

Qualified Distributions

A withdrawal from a qualified retirement plan. These distributions are both tax- and penalty-free. Eligible plans from which a qualified distribution can be made include 401(k)s and 403(b)s. Qualified distributions can't be used at an investor's discretion. Instead, they come with certain conditions and restrictions set by the Internal Revenue Service (IRS), so they aren't abused.

Rate of Return

The net gain or loss of an investment over a specified time period, expressed as a percentage of the investment’s initial cost. When calculating the rate of return, you are determining the percentage change from the beginning of the period until the end.

Retirement Planning

The process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to determine if the retirement income goal will be achieved.

Risk Assessment

A general term used across many industries to determine the likelihood of loss on an asset, loan, or investment. Assessing risk is essential for determining how worthwhile a specific investment is and the best process(es) to mitigate risk.

Risk Tolerance

The degree of variability in investment returns that an investor is willing to withstand in their financial planning. You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments; if you take on too much risk, you might panic and sell at the wrong time.

Roth 401(K)

An employer-sponsored investment savings account that is funded with after-tax dollars up to the plan's contribution limit. This type of investment account is well-suited for people who think they will be in a higher tax bracket in retirement than they are now, as withdrawals are tax-free.

Roth IRA conversion

A transfer of retirement assets from a Traditional, SEP, or SIMPLE IRA into a Roth IRA, which creates a taxable event. A Roth IRA conversion can be advantageous for individuals with large traditional IRA accounts who expect their future tax bills to stay at the same level or grow at the time they plan to start withdrawing from their tax-advantaged account, as a Roth IRA allows for tax-free withdrawals of qualified distributions.

Rule of 100

A financial planning formula that determines the amount of safe money you should have based on your age. It is calculated by subtracting your age from the number 100. The number you’re left with is the maximum amount of money you should have at risk whereas your age represents the minimum amount of money you want to keep safe.


Opposite of Discretionary.


A retirement savings plan that most small businesses with 100 or fewer employees can use. "SIMPLE" stands for "Savings Incentive Match Plan for Employees," and "IRA" stands for "Individual Retirement Account." Employers can choose to make a non-elective contribution of 2% of the employee's salary or a dollar-for-dollar matching contribution of the employee's contributions to the plan up to 3% of their salary.

Simplified Employee Pension (SEP)

An individual retirement account (IRA) that an employer or a self-employed person can establish. The employer is allowed a tax deduction for contributions made to the SEP IRA and makes contributions to each eligible employee’s plan on a discretionary basis.

Tax Deduction

A deduction that lowers a person's tax liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income in order to figure out how much tax is owed.

Tax Diversification

The allocation of investment dollars to more than one account type.

Tax-Free Money

Income from an account that grows without being taxed.

Taxable Income

The amount of income used to calculate how much tax an individual or a company owes to the government in a given tax year. It is generally described as adjusted gross income. Taxable income includes wages, salaries, bonuses, and tips, as well as investment income and unearned income.

Variable Annuity

A type of annuity contract, the value of which can vary based on the performance of an underlying portfolio of mutual funds.

Investopedia, Investopedia, www.investopedia.com/.