Your Retirement


403(b) plan:

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. Individual accounts in a 403(b) plan can be any of the following types:


  • An annuity contract, which is provided through an insurance company,
  • A custodial account, which is invested in mutual funds or
  • A retirement income account set up for church employees.

Generally, retirement income accounts can invest in either annuities or mutual funds. The features of the 403(b) plan are very similar to the 401(k) plan. Employees may make salary deferral contributions that are usually limited by regulatory caps.


Source - Investopedia.com


Annuity:

A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, issue a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.


Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that upon annuitization, payments will continue so long as either the annuitant or their spouse is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.


Annuities can be structured to provide fixed periodic payments or variable payments to the annuitant. The intent of variable annuities is to allow the annuitant to receive greater payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund's investments.


Source - Investopedia.com


Custodial accounts:

A retirement account managed for eligible employees by a custodian. The investments managed within a custodial account are limited to mutual funds and other similar products offered by regulated investment companies.


Bank, brokerage or other kinds of accounts established for a minor or beneficial owner but managed by a parent, custodian or registered owner. Also called custody account.


Sources - Investopedia.com and BusinessDictionary.com


Mutual Fund Plan:

An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.


One of the main advantages of mutual funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share, which is sometimes expressed as NAVPS.


Source - Investopedia.com


Tax-deferred Plan:

Refers to investment earnings such as interest, dividends or capital gains that accumulate free from taxation until the investor withdraws and takes possession of them. The most common types of tax-deferred investments include those in individual retirement accounts (IRAs) and deferred annuities.


By deferring taxes on the returns of an investment, the investor benefits in two ways. The first benefit is tax-free growth: instead of paying tax on the returns of an investment, tax is paid only at a later date, leaving the investment to grow unhindered. The second benefit of tax deferral is that investments are usually made when a person is earning higher income and is taxed at a higher tax rate. Withdrawals are made from an investment account when a person is earning little or no income and is taxed at a lower rate.


Source - Investopedia.com


Tax-shelter:

A legal method of minimizing or decreasing an investor's taxable income, and therefore, his or her tax liability. Tax shelters can range from investments or investment accounts that provide favorable tax treatment, to activities or transactions that lower taxable income. The most common type of tax shelter is an employer-sponsored 401(k) plan.


Tax authorities watch tax shelters carefully. If an investment is made for the sole purpose of avoiding or evading taxes, you could be forced to pay additional taxes and penalties. Tax minimization (also referred to as tax avoidance) is a perfectly legal way to minimize taxable income and lower taxes payable. Do not confuse this with tax evasion, the illegal avoidance of taxes through misrepresentation or similar means.


Source - Investopedia.com


Tax-sheltered annuities:

A type of annuity that allows an employee to make contributions from his or her income into a retirement plan. The contributions are deducted from the employee's income and, as a result, the contributions and related benefits are not taxed until the employee withdraws them from the plan. Because the employer can also make direct contributions to the plan, the employee gains the benefit of having additional tax-free funds accruing.


In the U.S., one specific tax-sheltered annuity is the Internal Revenue Code's Section 403(b) plan. This plan provides employees of certain non-profit and public education institutions the benefit of having a tax-sheltered method of saving for retirement.


There is usually a maximum amount that an employee can contribute to the plan, but sometimes there are "catch-up" provisions that allow employees to make additional contributions to make up for previous years where they did not make the maximum contribution.


Source - Investopedia.com