Annuity
A financial product that allows you to save for your future on a tax-deferred basis and then allows you to choose a payout option that meets your need for income when you retire - income for life, income for a certain period of time, or a lump sum payment.
Deferred annuity
A contract in which your premium payments (or payment) are invested, and then the annuity payout begins at a future date that you choose.
Defined benefit plan
In a defined benefit plan, each employee's future benefit is determined by a specific formula, and the plan provides a guaranteed level of benefits on retirement, e.g., $1,500 a month for the life of the employee and his or her spouse. A defined benefit plan is typically not contributory; the employer makes regular contributions to the entire plan to fund the future benefits of all participants. The employer bears the risk associated with providing the guaranteed level of retirement benefits. Usually, the promised benefit is tied to the employee's earnings, length of service, or both.
Defined contribution plan
In a defined contribution plan, employers generally promise to make annual or periodic contributions to accounts that are set up for each employee. Sometimes there are only employer contributions, sometimes only employee contributions, and sometimes both. The current contribution is guaranteed but the level of benefits at retirement is not. The benefit payable at retirement is based on money accumulated in each employee's account. The final retirement amount reflects the total of employer contributions, any employee contributions, and investment gains or losses.
Fixed annuity
An annuity contract in which the premiums you pay are invested in the general assets of the life insurance company, and the company guarantees you a fixed rate of return on your premiums until annuity payments begin. The insurance company then guarantees you a specified payment every month.
401(k) plan
An employer-sponsored retirement savings plan which allows employees to make tax-deferred contributions from current earnings.
403(b) plan
A retirement savings plan similar to a 401(k) plan for employees of charitable and educational organizations.
Keogh plan
A Keogh plan is a qualified retirement plan for self-employed individuals and their employees to which tax-deductible contributions up to a specified yearly limit can be made if the plan meets certain requirements of the Internal Revenue Code. Keogh plans, also called H.R.10 plans, may be defined benefit or defined contribution plans.
Immediate annuity
A contract in which annuity payouts begin immediately or within one year after the contract is purchased.
Life annuity
A life-contingent annuity provides an individual with guaranteed income payments for his or her life or, in some cases, for his or her life and that of another person, such as a spouse. This means that no matter how long an individual lives, annuity payments will continue to be paid.
Longevity risk
Longevity risk is the risk of outliving one's savings in retirement. In other words, regardless of how much most people save for retirement, they face a risk of not having enough because they cannot predict how long they are going to live.
Non-qualified annuity
“Non-qualified” refers to the fact that the particular annuity is not part of a qualified retirement plan or IRA and is purchased with after-tax dollars. In contrast, a “qualified” annuity is part of an employee benefit plan that has met certain requirements under the Internal Revenue Code, and is purchased with pre-tax dollars.
Pension Benefit Guaranty Corporation (PBGC)
PBGC was created by Congress to insure payment of certain pension plan benefits in the event a covered (that is, private-sector defined benefit) plan terminates with insufficient funds to pay the benefits. Covered plans or their sponsors must pay annual premiums to PBGC to provide funds from which guaranteed benefits can be paid.
Qualified plan (tax-qualified plan)
An employee benefit plan that meets certain Internal Revenue Code requirements. Employer contributions to such plans are immediately deductible by the employer, and contributions to and earnings in such plans are not included in the employee's or beneficiary's income until actually distributed to that recipient.
Roth IRA
An IRA in which earnings on contributions are not taxed, as long as the initial contribution has been in the account for five years before being withdrawn and the withdrawal occurs after the account holder is at least age 59, disabled, deceased or is purchasing his or her first home. Contributions to a Roth IRA are not tax-deductible.
Traditional IRA
An IRA provides individuals an opportunity to save for retirement on a tax-deferred basis. Individuals may contribute up to $3,000 per year; if you're married and filing jointly, another contribution of $3,000 may be made on behalf of a nonworking spouse. (Maximum contribution for those aged 50 or older is $3500.) The amount that is tax deductible varies according to an individual's pension coverage, income tax filing status, and adjusted gross income. Account balances distributed from one IRA or from a qualified retirement plan may be rolled over to another IRA.
Variable annuity
A contract in which the premiums you pay are invested in funds that you select from among those offered by the insurance company, including bond and stock funds. The account value and the annuity income payments you receive reflect the performance of the funds you selected. Over the long term, variable annuities invested in equities generally reflect the growth and performance of the economy and can serve as a hedge against inflation. They typically offer a death benefit which protects you against down markets.
