Learning the ABCs of IRAs and 401(k)s

One of the most popular ways to save for retirement is in a qualified plan, such as an IRA or 401(k), which basically are accounts that the government designates as retirement savings and therefore will give specific tax advantages. Learning all you need to know about qualified plans is easy, but knowing the lingo can shorten the learning curve. Practice with this word search. Also, be sure to check out this month's story on retirement planning.

*Some browsers may have the Word Seek Java applet blocked. Please enjoy the financial glossary.

Interest		In retirement planning, interest is a type of investment income in which a bank pays you in exchange for holding your money. For instance, you may have a savings account or a money market account that pays you interest.
Dividends		Another type of investment income, dividends are paid by companies as a way of sharing profits with their shareholders.
Returns		This is a generic term for all types of investment earnings. Whether you earn dividends, interest, capital gains, they all add up to an investment's returns.
Custodial Fee		This is a fee, usually ranging from $10 to $50 a year charged by financial companies for opening and maintaining your qualified plan.
Compounding		Compound interest is what brings tears of joy to the eyes of financial planners. When an investment earns interest or dividends, it becomes larger and thus has the capacity to earn larger interest amounts or dividends, which makes the investment larger, even faster. This acceleration can be very dramatic and is what is known as compounding.
Snowball Effect		This is the phrase almost every financial planner has used at one time or another to explain the power of compounding. The tiny snowball rolling down the mountain grows much bigger, much faster until it crushes the village in the valley.
Qualified Plan		It's just like a savings account or an investment account except that the financial institution tells the IRS that it's a retirement account. Depending on the type of qualified plan, the account enjoys tax advantages in exchange for holding on to the money until retirement.
SEP-IRA		SEP stands for Simplified Employer Pension Plan and IRA stands for Individual Retirement Account. So, a SEP-IRA is an IRA for employers who have few or no employees. This is a qualified plan for the self-employed.
Employer Match		An employer match makes it almost worthwhile to put up with, well, a boss. Companies that offer 401(k) plans often offer matching contributions. So, if you elect to have 6 percent taken out of each paycheck, your employer might add 3 percent of its own money. Another word for employer match is "free money."
Tax Sheltered		Generally speaking, qualified plans are tax-sheltered, which means you get a break or a deferment from the IRS on your earnings.
Tax Deferred		A qualified plan that is tax-deferred means you won't be taxed on your investment's earnings until you withdraw the funds at retirement. This enables your investment to grow faster, unfettered by taxes.
Tax Exempt		This means free of taxes. With a Roth IRA, the distributions are tax exempt.
Distributions		After you've amassed your retirement account and it's time to make withdrawals, those withdrawals are also called distributions.
Contributions		Any money that you or your employer puts into your retirement account.
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