When it comes to thinking about retirement, sorting through financial jargon can make things confusing. Don't let this lack of certainty cause you to put off saving for retirement until later — or worse — not at all.
Learn some of the retirement terms and definitions you need to know in order to make decisions for your financial future.
Here's a basic retirement glossary that can help you get started.
A retirement fund, generally speaking, is a special account either sponsored by your employer or established on your own to invest contributions for future retirement income.
A 401(k) is an employer-sponsored retirement savings plan. It's also known as a defined contribution plan. This plan allows employees to make regular contributions that are tax-deductible to an investment account for use in retirement. Contributions have a maximum annual contribution limit set by the Internal Revenue Service (IRS).
Many employers also offer a 401(k) matching program, where the employer will set a pre-determined amount to match employee contributions. For example, the employer might match $.50 for every contributed dollar up to a specified percentage of your income.
Individual retirement account (IRA)
An IRA is an investment account for retirement saving. These accounts have a set annual contribution limit defined by the IRS.
IRAs are "tax-advantaged," meaning they have tax benefits, which depend on the type of IRA you choose. Once you hit the age of 59 1/2, you can begin withdrawing from your IRA. If you withdraw before that age, you will face additional tax penalties.
One type of IRA is a Traditional IRA. It is a tax-deferred retirement option, meaning you make contributions with your pre-tax dollars and don't pay taxes until the money is disbursed. You are taxed at your current income tax rate at the time of withdrawal.
Traditional IRAs have set annual contribution limits, and you must begin to take your required minimum distributions (RMDs) by age 72.
Another type of IRA is a Roth IRA. With a Roth IRA, you contribute after-tax dollars. However, you can withdraw your contributions — the money you put into the account — anytime without taxes or penalties. Earnings on contributions can also be withdrawn without taxes or penalties, however, only if the conditions set forth by the IRS are met.
As with other types of investment accounts, the IRS determines the maximum yearly contributions you can make. Moreover, Roth IRAs don't have any RMD requirements.
Pre-tax retirement accounts
A pre-tax retirement account is an account for which you do not pay taxes on your contributions or earnings until you begin withdrawing from them. For many, the benefit of this type of account is that contributions made up to the IRS-declared annual contribution limit are exempt from federal income tax for that year.
After-tax retirement accounts
With an after-tax retirement account, the contributions you withdraw are not taxed. This is because you have already paid taxes on your contributions, as they have been made with after-tax dollars.
A pension plan is another type of retirement plan. It's also called a defined benefit plan. With this type of retirement plan, your employer funds and invests contributions for you. They also define the income that you will get from the pool of investments based on a set calculation that can include total earnings, age and years worked at the company.
With a retirement annuity, you pay a lump sum or a series of payments to an insurance company, and, in return, the company will pay you a lump sum or series of payments for a pre-determined number of years or for the rest of your life.
Many use retirement annuities to provide a stable source of income during retirement.
Annuities are intended as vehicles for long-term retirement planning, which is why withdrawals reduce an annuity's remaining death benefit, contract value, cash surrender value and future earnings. Annuities also may be subject to income tax and, if taken prior to age 59 ½, an additional 10% IRS tax penalty may apply.
Ready to learn more? Get an overview of the different types of retirement funds.