Adjusted Gross Income (AGI)
An interim calculation in the computation of income tax liability.
It is computed by subtracting certain allowable adjustments from gross
A person appointed by the court to settle an estate when there is
The return from an investment after the effects of taxes have been
taken into account.
Aggressive Growth Fund
A mutual fund whose primary investment objective is substantial capital
Alternative Minimum Tax
A method of calculating income tax that disallows certain deductions,
credits, and exclusions. This was intended to ensure that individuals,
trusts, and estates that benefit from tax preferences do not escape
all federal income tax liability. People must calculate their taxes
both ways and pay the greater of the two.
An insurance-based contract that provides future payments at regular
intervals in exchange for current premiums. Annuity contracts are usually
purchased from banks, credit unions, brokerage firms, or insurance companies.
Anything owned that has monetary value.
The process of repositioning assets within a portfolio to maximize
return for a given level of risk. This process is usually done using
the historical performance of the asset classes within sophisticated
A category of investments with similar characteristics.
The examination of the accounting and financial documents of a firm
by an objective professional. The audit is done to determine the records'
accuracy, consistency, and conformity to legal and accounting principles.
When the stock market appears to be declining overall, it is said
to be a bear market.
A person named in a life insurance policy, annuity, will, trust, or
other agreement to receive a financial benefit upon the death of the
owner. A beneficiary can be an individual, company, organization, and
Blue Chip Stock
The common stock of a company with a long history of profitability
and consistent dividend payments.
A bond is evidence of a debt in which the issuer promises to pay the
bondholders a specified amount of interest and to repay the principal
at maturity. Bonds are usually issued in multiples of $1,000.
The net value of a company's assets, less its liabilities and the
liquidation price of its preferred issues. The net asset value divided
by the number of shares of common stock outstanding equals the book
value per share, which may be higher or lower than the stock's market
When the stock market appears to be advancing overall, it is said
to be a bull market.
A buy-sell agreement is an arrangement between two or more parties
that obligates one party to buy the business and another party to sell
the business upon the death, disability, or retirement of one of the
Capital Gain or Loss
The difference between the sales price and the purchase price of a
capital asset. When that difference is positive, the difference is referred
to as a capital gain. When the difference is negative, it is a capital
Short-term investments, such as U.S. Treasury securities, certificates
of deposit, and money market fund shares, that can be readily converted
Cash Surrender Value
The amount that an insurance policyholder is entitled to receive when
he or she discontinues coverage. Policyholders are usually able to borrow
against the surrender value of a policy from the insurance company.
Loans that are not repaid will reduce the policy's death benefit.
CERTIFIED FINANCIAL PLANNER® Practitioner
A credential granted by the Certified Financial Planner Board of Standards,
Inc. (Denver, CO) to individuals who complete a comprehensive curriculum
in financial planning and ethics. CFP®, CERTIFIED FINANCIAL
PLANNER® and federally registered CFP (with flame logo)®
are certification marks owned by the Certified Financial Planner Board
of Standards. These marks are awarded to individuals who successfully
complete the CFP Board's initial and ongoing certification.
Certified Public Accountant (CPA)
A professional license granted by a state board of accountancy to
an individual who has passed the Uniform CPA Examination (administered
by the American Institute of Certified Public Accountants) and has fulfilled
that state's educational and professional experience requirements for
Charitable Lead Trust
A trust established for the benefit of a charitable organization under
which the charitable organization receives income from an asset for
a set number of years or for the trustor's lifetime. Upon the termination
of the trust, the asset reverts to the trustor or to his or her designated
heirs. This type of trust can reduce estate taxes and allows the trustor's
heirs to retain control of the assets.
Charitable Remainder Trust
A trust established for the benefit of a charitable organization under
which the trustor receives income from an asset for a set number of
years or for the trustor's lifetime. Upon the termination of the trust,
the asset reverts to the charitable organization. The trustor receives
a charitable contribution deduction in the year in which the trust is
established, and the assets placed in the trust are exempt from capital
Chartered Financial Consultant (ChFC)
A professional financial planning designation granted by The American
College (Bryn Mawr, PA) to individuals who complete a comprehensive
curriculum in financial planning. Prerequisites include passing a series
of written examinations, meeting specified experience requirements and
maintaining ethical standards. The curriculum encompasses wealth accumulation,
risk management, income taxation, planning for retirement needs, investments,
estate and succession planning.
Chartered Life Underwriter (CLU)
A professional designation granted by The American College to individuals
who complete a comprehensive curriculum focused primarily on risk management.
Prerequisites include passing a series of written examinations, meeting
specified experience requirements, and maintaining ethical standards.
The curriculum encompasses insurance and financial planning, income
taxation, individual life insurance, life insurance law, estate and
succession planning, and planning for business owners and professionals.
The Consolidated Omnibus Budget Reconciliation Act is a federal law
requiring employers with more than 20 employees to offer terminated
or retired employees the opportunity to continue their health insurance
coverage for 18 months at the employee's expense. Coverage may be extended
to the employee's dependents for 36 months in the case of divorce or
death of the employee.
Coinsurance or Co-Payment
The amount an insured person must pay for a covered medical and/or
dental expense if his or her insurance doesn't provide 100 percent coverage.
The generic term for goods such as grains, foodstuffs, livestock,
oils, and metals which are traded on national exchanges. These exchanges
deal in both "spot" trading (for current delivery) and "futures" trading
(for delivery in future months).
A unit of ownership in a corporation. Common stockholders participate
in the corporation's profits or losses by receiving dividends and by
capital gains or losses in the stock's share price.
State laws vary, but generally all property acquired during a marriage
- excluding property one spouse receives from a will, inheritance, or
gift - is considered community property, and each partner is entitled
to one half. This includes debt accumulated. There are currently nine
community property states: Arizona, California, Idaho, Louisiana, Nevada,
New Mexico, Texas, Washington, and Wisconsin.
Interest that is computed on the principal and on the accrued interest.
Compound interest may be computed continuously, daily, monthly, quarterly,
semiannually, or annually.
Consumer Price Index
The U.S. Department of Labor's main indicator of inflation. The Consumer
Price Index is calculated each month from the cost of some 400 retail
items in urban areas throughout the United States.
An amount that can be subtracted from gross income, from a gross estate,
or from a gift, thereby lowering the amount on which tax is assessed.
Defined Benefit Plan
A qualified retirement plan under which a retiring employee will receive
a guaranteed retirement fund, usually payable in installments. Annual
contributions may be made to the plan by the employer at the level needed
to fund the benefit. The annual contributions are limited to a specified
amount, indexed for inflation.
Defined Contribution Plan
A retirement plan under which the annual contributions made by the
employer or employee are generally stated as a fixed percentage of the
employee's compensation or company profits. The amount of retirement
benefits is not guaranteed; rather, it depends upon the investment performance
of the employee's account.
Investing in different companies, industries, or asset classes. Diversification
may also mean the participation of a large corporation in a wide range
of business activities.
A pro rata portion of earnings distributed in cash by a corporation
to its stockholders. In preferred stock, dividends are usually fixed;
with common shares, dividends may vary with the fortunes of the company.
Dollar Cost Averaging
A system of investing in which the investor buys a fixed dollar amount
of securities at regular intervals. The investor thus buys more shares
when the price is low and fewer shares when it rises, and the average
cost per share is lower than the average price per share. This strategy
does not protect against loss in declining markets and involves continuous
investments, regardless of fluctuating price levels.
A statistical result from the analysis of the risk and return for
a given set of assets that indicates the balance of assets that may,
under certain assumptions, achieve the best return for a given level
Employer-Sponsored Retirement Plan
A tax-favored retirement plan that is sponsored by an employer. Among
the more common employer-sponsored retirement plans are 401(k) plans,
403(b) plans, simplified employee pension plans, and profit-sharing
The value of a person's ownership in real property or securities;
the market value of a property or business, less all claims and liens
The Employee Retirement Income Security Act is a federal law covering
all aspects of employee retirement plans. If employers provide plans,
they must be adequately funded and provide for vesting, survivor's rights,
ESOP (employee stock ownership plan)
A defined contribution retirement plan in which company contributions
must be invested primarily in qualifying employer securities.
Activities coordinated to provide for the orderly and cost-effective
distribution of an individual's assets at the time of his or her death.
Estate conservation often includes wills and trusts.
Upon the death of a decedent, federal and state governments impose
taxes on the value of the estate left to others (with limitations).
Executive Bonus Plan
The employer pays for a benefit that is owned by the executive. The
bonus could take the form of cash, automobiles, life insurance, or other
items of value to the executive.
A person named by the probate courts or the will to carry out the
directions and requests of the decedent.
Income from investments such as CDs, Social Security benefits, pension
benefits, some annuities, or most bonds that is the same every month.
A defined contribution plan that may be established by a company for
retirement. Employees may allocate a portion of their salaries into
this plan, and contributions are excluded from their income for tax
purposes (with limitations). Contributions and earnings will compound
tax deferred. Withdrawals from a 401(k) plan are taxed as ordinary income,
and may be subject to an additional 10 percent federal tax penalty if
withdrawn prior to age 59 ½.
A defined contribution plan that may be established by a nonprofit
organization or school for retirement. Employees may allocate a portion
of their salaries into this plan, and contributions are excluded from
their income for tax purposes (with limitations). Contributions and
earnings will compound tax deferred. Withdrawals from a 403(b) plan
are taxed as ordinary income, and may be subject to an additional 10
percent federal tax penalty if withdrawn prior to age 59 ½.
An approach to the stock market in which specific factors - such as
the price-to-earnings ratio, yield, or return on equity - are used to
determine what stock may be favorable for investment.
A federal tax levied on the transfer of property as a gift. This tax
is paid by the donor. The first $11,000 a year from a donor to each
recipient is exempt from tax. Most states also impose a gift tax. The
gift tax exemption is indexed annually for inflation.
A will entirely in the handwriting of the testator. Without witnesses,
holographic wills are valid and enforceable only in some states.
A calculation that uses a selection of stocks or bonds to gauge a
certain market. The Dow Jones Industrial Average, for example, is an
index of 30 large industrial companies on the New York Stock Exchange.
Individual Retirement Account (IRA)
Contributions to a traditional IRA are deductible from earned income
in the calculation of federal and state income taxes if the taxpayer
meets certain requirements. The earnings accumulate tax deferred until
withdrawn, and then they are taxed as ordinary income. Individuals not
eligible to make deductible contributions may make nondeductible contributions,
the earnings on which would be tax deferred.
An increase in the price of products and services over time. The government's
main measure of inflation is the Consumer Price Index.
The condition of an estate left by a decedent without a valid will.
State law then determines who inherits the property or serves as guardian
for any minor children.
A broad class of assets with similar characteristics. The five investment
categories include cash equivalents, fixed principal, equity, debt,
A trust that may not be modified or terminated by the trustor after
Joint and Survivor Annuity
Most pension plans must offer this form of pension plan payout that
pays over the life of the retiree and his or her spouse after the retiree
dies. The retiree and his or her spouse must specifically choose not
to accept this payment form.
Co-ownership of property by two or more people in which the survivor(s)
automatically assumes ownership of a decedent's interest.
Jointly Held Property
Property owned by two or more persons under joint tenancy, tenancy
in common, or, in some states, community property.
This retirement plan, named for Eugene Keogh, is designed for self-employed
individuals. Up to $40,000 of self-employed income may be deducted from
compensation and set aside into the plan.
Any claim against the assets of a person or corporation: accounts
payable, wages, and salaries payable, dividends declared payable, accrued
taxes payable, and fixed or long-term obligations such as mortgages,
debentures, and bank loans.
Limited partnerships pool the money of investors to develop or purchase
income-producing properties. When the partnership subsequently receives
income from these properties, it distributes the income to its investors
as dividend payments.
The ease with which an asset or security can be converted into cash
without loss of principal.
A trust created by a person during his or her lifetime.
The disbursement of the entire value of a profit-sharing plan, pension
plan, annuity, or similar account to the account owner or beneficiary.
Lump-sum distributions may be rolled over into another tax-deferred
Marginal Tax Bracket
The range of taxable income that is taxable at a certain rate. Currently,
there are six marginal tax brackets: 10 percent, 15 percent, 25 percent,
28 percent, 33 percent, and 35 percent.
A provision of the tax codes that allows all assets of a deceased
spouse to pass to the surviving spouse free of estate taxes. This provision
is also referred to as the unlimited marital deduction.
Money Market Fund
A mutual fund that specializes in investing in short-term securities
and that tries to maintain a constant net asset value of $1.
A debt security issued by municipalities. The income from municipal
bonds is usually exempt from federal income taxes. In many states, it
is also exempt from state income taxes in the state in which the municipal
bond is issued.
Net Asset Value
The price at which a mutual fund sells or redeems its shares. The
net asset value is calculated by dividing the net market value of the
fund's assets by the number of outstanding shares.
Pooled Income Fund
A trust created by a charitable organization that combines the contributions
of several donors and distributes income to those donors based on the
earnings of the trust. The trust is managed by the charitable organization,
and contributions are partially deductible for income tax purposes.
All the investments held by an individual or a mutual fund.
A class of stock with claim to a company's earnings, before payment
can be made on the common stock, and that is usually entitled to priority
over common stock if the company liquidates. Generally, preferred stocks
pay dividends at a fixed rate.
A legal agreement arranged before marriage stating who owns property
acquired before marriage and during marriage and how property will be
divided in the event of divorce. ERISA benefits are not affected by
Price/Earnings Ratio (P/E Ratio)
The market price of a stock divided by the company's annual earnings
per share. Because the P/E ratio is a widely regarded yardstick for
investors, it often appears with stock price quotations.
In a security, the principal is the amount of money that is invested,
excluding earnings. In a debt instrument such as a bond, it is the face
The court-supervised process in which a decedent's estate is settled
An agreement under which employees share in the profits of their employer.
The company makes annual contributions to the employees' accounts. These
funds usually accumulate tax deferred until the employee retires or
leaves the company.
A document provided by mutual fund companies to prospective investors.
The prospectus gives information needed by investors to make informed
decisions prior to investing in a specific mutual fund. The prospectus
includes information on the minimum investment amount, the fund's objectives,
past performance, risk level, sales charges, management fees, and any
other expense information about the fund, as well as a description of
the services provided to investors in the fund.
Qualified Domestic Relations Order (QDRO)
At the time of divorce, this order would be issued by a state domestic
relations court and would require that an employee's ERISA retirement
plan accrued benefits be divided between the employee and the spouse.
Qualified Retirement Plan
A pension, profit-sharing, or qualified savings plan that is established
by an employer for the benefit of the employees. These plans must be
established in conformity with IRS rules. Contributions accumulate tax
deferred until withdrawn and are deductible to the employer as a current
A trust in which the creator reserves the right to modify or terminate
The chance that an investor will lose all or part of an investment.
Refers to the assumption that rational investors will choose the security
with the least risk if they can maintain the same return. As the level
of risk goes up, so must the expected return on the investment.
A method by which an individual can transfer the assets from one retirement
program to another without the recognition of income for tax purposes.
The requirements for a rollover depend on the type of program from which
the distribution is made and the type of program receiving the distribution.
A nondeductible IRA that allows tax-free withdrawals when certain
conditions are met. Income and contribution limits apply.
Evidence of an investment, either in direct ownership (as with stocks),
creditorship (as with bonds), or indirect ownership (as with options).
Simplified Employee Pension Plan (SEP)
A type of plan under which the employer contributes to an employee's
IRA. Contributions may be made up to a certain limit and are immediately
An insurance-based contract that provides future payments at regular
intervals in exchange for current premiums. Generally used as a supplement
to retirement income and pays over the life of one individual, usually
the retiree, with no rights of payment to any survivor.
An arrangement under which two parties (usually a corporation and
employee) share the cost of a life insurance policy and split the proceeds.
An IRA designed for a couple when one spouse has no earned income.
The maximum combined contribution that can be made each year to an IRA
and a spousal IRA is $6,000 (in 2002 through 2004) or 100 percent of
earned income, whichever is less. This total may be split between the
two IRAs as the couple wishes, provided the contribution to either IRA
does not exceed $3,000.
The range of taxable income that is taxed at a certain rate. Brackets
are expressed by their marginal rate.
Tax credits, the most appealing type of tax deductions, are subtracted
directly, dollar for dollar, from your income tax bill.
Interest, dividends, or capital gains that grow untaxed in certain
accounts or plans until they are withdrawn.
Under certain conditions, the interest from bonds issued by states,
cities, and certain other government agencies is exempt from federal
income taxes. In many states, the interest from tax-exempt bonds will
also be exempt from state and local income taxes.
The amount of income used to compute tax liability. It is determined
by subtracting adjustments, itemized deductions or the standard deduction,
and personal exemptions from gross income.
An approach to investing in stocks in which a stock's past performance
is mapped onto charts. These charts are examined to find familiar patterns
to use as an indicator of the stock's future performance.
Tenancy in Common
A form of co-ownership. Upon the death of a co-owner, his or her interest
passes to his or her chosen beneficiaries and not to the surviving owner
Term life insurance provides a death benefit if the insured dies.
Term insurance does not accumulate cash value and ends after a certain
number of years or at a certain age.
A trust established by a will that takes effect upon death.
One who has made a will or who dies having left a will.
The total of all earnings from a given investment, including dividends,
interest, and any capital gain.
A legal entity created by an individual in which one person or institution
holds the right to manage property or assets for the benefit of someone
else. Types of trusts include: Testamentary Trust – A trust established
by a will that takes effect upon death; Living Trust – A trust created
by a person during his or her lifetime; Revocable Trust – A trust
in which the creator reserves the right to modify or terminate the trust;
Irrevocable Trust – A trust that may not be modified or terminated
by the trustor after its creation
An individual or institution appointed to administer a trust for its
A method of transferring retirement plan assets from one employer's
plan to another employer plan or to an IRA. One benefit of this method
is that no federal income tax will be withheld by the trustee of the
A credit that may be applied against an individual's gift or estate
taxes. The unified credit will increase in gradual steps until it eventually
exempts an estate valued up to $3,500,000 from federal estate taxes
Universal Life Insurance
A type of life insurance that combines a death benefit with a savings
element which accumulates tax deferred at current interest rates. Under
a universal life insurance policy, the policyholder can increase or
decrease his or her coverage, with limitations, without purchasing a
The range of price swings of a security or market over time.
Welfare Benefit Plan
An employee benefit plan that provides such benefits as medical, sickness,
accident, disability, death, or unemployment benefits.
Whole Life Insurance
A type of life insurance that offers a death benefit and also accumulates
cash value, tax deferred at fixed interest rates. Whole life insurance
policies generally have a fixed annual premium that does not rise over
the duration of the policy. Whole life insurance is also referred to
as "ordinary" or "straight" life insurance.
A legal document that declares a person's wishes concerning the disposition
of property, the guardianship of his or her children, and the administration
of the estate after his or her death.
In general, the yield is the amount of current income provided by
an investment. For stocks, the yield is calculated by dividing the total
of the annual dividends by the current price. For bonds, the yield is
calculated by dividing the annual interest by the current price. The
yield is distinguished from the return, which includes price appreciation
This type of bond makes no periodic interest payments but instead
is sold at a steep discount from its face value. Bondholders receive
the face value of their bonds when they mature.