Financial Terms, Made Clear

A 1035 exchange allows you to swap certain insurance-related products, such as cash-value life insurance policies or annuity contracts, for another of like kind—without creating a taxable event.

The total amount of money in an account at the end of a specific reporting period. For example, a credit card account balance reflects the total amount owed to the lender from purchases made during that time.

A mutual fund that invests in both stocks and bonds to offer a mix of growth and income. These funds are subject to market risk and may fluctuate in value. When redeemed, shares may be worth more or less than their original cost. Mutual funds are sold by prospectus, which contains important information about fees, risks, and investment goals. Be sure to review the prospectus carefully before investing. A copy is available from your financial professional.

The profit or loss resulting from the sale of an asset. A capital gain occurs when the asset sells for more than its purchase price; a capital loss occurs when it sells for less.

A financial obligation where one party (the debtor) owes money to another party (the creditor), often with agreed-upon terms for repayment.

The removal of funds from an investment or retirement account before a specified maturity date or before meeting age requirements. Early withdrawals from tax-deferred accounts may incur penalties and taxes.

A range of income levels taxed at specific rates under the U.S. federal income tax system. Each portion of a taxpayer’s income is taxed at the rate assigned to the corresponding bracket.

The voluntary transfer of property or assets to another person without receiving payment or retaining any interest.

A tax-advantaged savings account for individuals covered by high-deductible health plans, allowing funds to be saved for medical expenses. Contributions are tax-free within limits, and unused funds can roll over year to year.

Money or other compensation received from any source, including wages, commissions, bonuses, Social Security and other retirement benefits, unemployment compensation, disability payments, interest, and dividends. Generally, all income is taxable unless specifically exempted by law.

A form of shared property ownership where two or more people hold equal, undivided interests. Upon the death of one joint tenant, ownership automatically passes to the surviving joint tenant(s).

A tax-deferred retirement savings plan for self-employed individuals and employees of unincorporated businesses. Similar to IRAs but with higher contribution limits. Distributions are taxed as ordinary income and may be penalized if taken before age 59½. Required minimum distributions typically begin at age 70½.

A contract where an insurance company promises to pay a specified benefit to beneficiaries upon the policyholder’s death in exchange for premiums. The cost and availability depend on factors such as age, health, and the type and amount of coverage. Life insurance policies include fees such as mortality and administrative charges. Early policy surrender may trigger surrender fees and tax consequences. It’s important to assess insurability before purchasing life insurance. Policy guarantees rely on the insurer’s ability to fulfill claims.

A charge for professional management of assets, typically calculated as a percentage of the total asset value. Fee details are disclosed in the investment prospectus.

An American stock exchange originally founded by the National Association of Securities Dealers. Launched on February 8, 1971, NASDAQ was the world’s first electronic stock market.

The formal name for the Social Security program, which provides retirement benefits as well as disability income, veterans’ pensions, public housing assistance, and food stamps.

A business arrangement in which two or more individuals share management and profits of a business venture.

A retirement plan established according to IRS rules (Section 401(a)) that receives favorable tax treatment.

A measurement of an investment’s performance, calculated by dividing the gain or loss by the initial investment cost. This usually includes income like dividends or interest in addition to capital gains.

A retirement plan designed for small businesses (with 100 or fewer employees) that allows both employers and employees to contribute to traditional IRAs established for employees.

An amount that directly reduces the amount of income tax owed after calculating preliminary tax liability.

A law available in some states that allows assets to be held in a custodian’s name for the benefit of a minor without creating a formal trust. When the minor reaches the age of majority as defined by their state, the assets transfer fully to them and may be used for any purpose.

An interest rate that fluctuates over time based on a benchmark or index, such as money market rates or the lender’s cost of funds.

A legal document that specifies how an individual or couple wants their assets distributed after death and names guardians for any minor children.

The income generated by an investment, expressed as a percentage of the original investment cost. Yield accounts only for income (such as dividends or interest) and does not include capital gains or losses.

A bond that does not pay periodic interest. Instead, it is sold at a discount to its face value, and the investor receives the full face value at maturity. Bond prices fluctuate with interest rates; rising rates generally reduce bond prices. Selling before maturity can result in gains or losses. Holding to maturity ensures repayment of principal plus interest, unless the issuer defaults. Zero-coupon bonds and other bonds carry risks including interest rate risk, call risk, market fluctuations, and default risk. Some municipal bonds may be subject to the alternative minimum tax or become taxable after purchase. Buying bonds at a premium can result in realized losses.