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Glossary

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1035 Exchange

A method of exchanging insurance-related assets without triggering a taxable event. Cash-value life insurance policies and annuity contracts are two products that may qualify for a 1035 exchange.

401(k) Plan

A qualified retirement plan available to eligible employees of companies. 401(k) plans allow eligible employees to defer taxation on a specific percentage of their income that is to be put toward retirement savings; taxes on this deferred income and on any earnings the account generates are deferred until the funds are withdrawn—normally in retirement. Employers may match part or all of an employee’s contributions. Employees may be responsible for investment selections and enjoy the direct tax savings.

401(k) Loan

A loan taken from the assets within a 401(k) account; 401(k) loans charge interest and are normally paid back through payroll deductions. If the borrower leaves an employer before a 401(k) loan has been repaid, the full amount of the loan is generally due. If the borrower fails to repay the loan, it is considered a distribution, and ordinary income taxes may be due along with any applicable tax penalties. Note: under the Tax Cuts and Jobs Act, you don’t have to pay taxes or the penalty if you repay the loan by the due date of your tax return for the year that you leave your job (including extensions). For example, if you leave your job in 2020, you’d have until April 15, 2021, to repay the loan.

403(b) Plan

A 403(b) plan is similar to a 401(k). A 403(b) is a qualified retirement plan available to employees of non-profit and government organizations.

Account Balance

The amount held in an account at the end of a reporting period. For example, a credit card account balance would show the amount owed to a lender as a result of purchases made during a specific period.

Adjustable-Rate Mortgage (ARM)

A mortgage with an interest rate that is adjusted periodically based on an index. Adjustable-rate mortgages generally have lower initial interest rates than fixed-rate mortgages because the lender is able to transfer some of the risk to the borrower; if prevailing rates go higher, the interest rate on a variable mortgage may adjust upward as well.

Adjusted Gross Income (AGI)

One figure used in the calculation of income tax liability. AGI is determined by subtracting allowable adjustments from gross income.

Administrator

A probate-court-appointed person who is tasked with settling an estate for which there is no will.

After-Tax Return

The return on an investment after subtracting any taxes due.

Aggressive Growth Fund

A mutual fund offered by an investment company that specifically pursues substantial capital gains. Mutual fund balances are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost. Mutual funds are sold only by prospectus. Individuals are encouraged to consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Alternative Minimum Tax (AMT)

A method of calculating income tax with a unique set of rules for deductions and exemptions that are more restrictive than those in the traditional tax system. The AMT attempts to ensure that certain high-income taxpayers don’t pay a lower effective tax rate than everyone else. To determine whether or not the AMT applies, taxpayers must fill out IRS Form 6251.

Annual Percentage Rate (APR)

The yearly cost of a loan expressed as a percentage of the loan amount. The APR includes interest owed and any fees or additional costs associated with the agreement.

Annual Report

A report required by the Securities and Exchange Commission (SEC) of any company issuing registered stock, that describes a company’s management, operations, and financial reports. Annual reports are sent to shareholders, and must also be available for public review.

Annuity

A contract with an insurance company that guarantees current or future payments in exchange for a premium or series of premiums. The interest earned on an annuity contract is not taxable until the funds are paid out or withdrawn. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, penalties may apply. The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have fees and charges associated with the contract, and a surrender charge also may apply if the contract owner elects to give up the annuity before certain time-period conditions are satisfied.

Appraisal

A formal assessment of a property’s value at a specific point in time, performed by a qualified professional.

Asset

Anything owned that has a current value that may provide a future benefit.

Asset Allocation

A method of allocating funds to pursue the highest potential return at a specific level of risk. Asset allocation normally uses sophisticated mathematical analysis of the historical performance of asset classes to attempt to project future risk and return. Asset allocation is an approach to help manage investment risk. It does not guarantee against investment loss.

Asset Class

A specific category of investments that share similar characteristics and tend to behave similarly in the marketplace.

Audit

In accounting, the formal examination of a company’s financial records by a qualified professional to determine the records’ accuracy, consistency, and conformity to legal standards and established accounting principles. In taxes, the formal examination of a tax return by the Internal Revenue Service or other authority to determine its accuracy.

Automatic Reinvestment

An arrangement under which an institution automatically deposits dividends or capital gains generated by an individual’s investment back into the investment to purchase additional shares.