Broker Check

Common Finance Jargon

February 20, 2024

Common finance jargon - it’s bittersweet to me.

Personally, I love it. But I understand completely how the finance industry has taken it and yields
it like a sword over clients. It’s very frustrating. I meet with hundreds of clients and prospective
clients every year and because of that I’ve identified the most common jargon that may be
unfamiliar to many. While I always do my best to speak to clients at whatever their comfort level
is, there is some finance jargon that’s probably worth knowing.

Here are 10 of the most common finance jargon that you may not know (and that’s okay!)

1. Bull & Bear Market - Why these types of markets were named after these specific
animals is beyond me. I’m sure there’s some blog out there explaining why, but I’ve
never searched it out. Both indicate the performance of the stock market. Bull markets
are stock markets that are going up and people are making money. There’s no official
definition here of what defines one but most people consider it to be a rise of 20% or
more in the stock market. Bear markets are going to be the opposite of bull markets.
These are markets where investors are losing money, typically defined by a 20% or more
drop in stock market prices.

2. Traditional & Roth - Traditional is commonly also referred to as “Pre-tax”. Both traditional
and Roth are references to the tax classification of the account and can be had on most
retirement accounts including 401k, 403b, IRA, etc. For instance a traditional 401k or a
Roth 401k. Traditional (pre-tax) means it reduces your current income for the year,
reducing your income and therefore reducing your taxes. These funds then will be taxed
as normal income when you pull them out in retirement. Roth will be the opposite of this.
When you contribute these funds you are contributing them after-tax meaning you do not
get a tax deduction for the current year. However, when you pull these funds out of the
account in retirement everything, including the growth, will come out tax free.

3. 401k, 403b, 457 - These are the most common workplace retirement plans you will see.
They all function similarly, although there are slight variations between them. They allow
you to contribute to them from your paycheck and they will be invested for retirement.
Within them you can invest in many asset classes, most commonly cash, bonds and
stocks. Many times they are offered in both traditional and Roth options. For 2024, an
employee can contribute $23,000 and an extra $7,500 if you are over age 50. Typically,
you will only get a match from your employer into a 401k.

4. IRAs - An IRA, or you may pronounce it IRA, stands for Individual Retirement Account.
These are going to be similar to a 401k, 403b and 457 however they are not tied to your
workplace. These typically can be invested in many more options compared to a 401k,
403b and 457, such as individual ETFs and stocks. These have income based eligibility
rules so make sure you are eligible to contribute beforehand. For 2024, the contribution
limit is $7,000 and an extra $1,000 if you are over age 50.

5. ETFs - This stands for Exchange Traded Fund. ETFs are similar to mutual funds, which
may give you some context, just with a couple of slight variations. ETFs are publicly
traded and allow one purchase of a share to get partial ownership of numerous
companies that the fund owns. ETFs come in all shapes and sizes. For example, an
S&P 500 ETF would allow you to purchase one share and get exposure to the 500
largest companies in America. Or, there are artificial intelligence ETFs that allow you to
purchase one share and get exposure to numerous companies related to artificial

6. RMDs - RMD stands for required minimum distribution. RMDs are when the federal
government forces you to take distributions from your accounts. RMDs are applicable
(for all intensive purposes) to traditional (pre-tax) accounts whether it is an IRA, 401k,
403b, 457, etc. They start at either age 73 or 75 depending on when you were born. You
might be asking why. Because recall when you read that traditional (pre-tax) accounts
get a tax deduction and therefore you pay less in taxes at that time? Well Uncle Sam is
ready to start collecting those taxes and by forcing you to take the funds out, you are
going to be paying taxes on those funds. Oh, and the percentage you are required to
take out increases every year!

7. Roth Conversion - A Roth conversion is a potentially great strategic move in your
retirement plan. This involves taking funds in your traditional (pre-tax) accounts, paying
the taxes and converting them into a Roth. Why would you do this? A couple main
reasons. The first is that everything in a Roth grows tax free and you can pull it out tax
free! The other is that pesky term we just learned (RMDs) are going to force you to take
the money out eventually so why not take it out now, get the taxes over with and you
never have to pay taxes on it again. It’s a bit deeper of concept on whether it makes
sense for you or not, but that’s the main idea.

8. IRMAA - Sounds like a woman’s name but it is actually an acronym. It stands for
Income-Related Monthly Adjustment Amount. This is a measure of your income from two
years prior that affects if you pay an extra for your Medicare Part B & D payments should
your income be above certain thresholds. There are multiple levels of IRMAA brackets
and the more your income pierces through these levels, the more you pay. The
increased payments are per spouse per month, but it gets evaluated each year.

9. QCDs - QCD stands for Qualified Charitable Distribution. Once you turn age 70.5 (so
random), you can start using these to donate to charity. The funds will come from your
traditional (pre-tax) IRA and will not be taxed to you nor the charity. They can be used to
satisfy your RMDs and not add on taxable income. If you do any charitable giving, this
may be the way to do it.

10. Target Date Fund - A target date fund is a common investment option within a 401k,
403b or 457. They typically have a year in the name of the fund and whatever year you
believe you will retire, you choose that one. Quite frankly, target date funds are just
there. I don’t love them but I don’t hate them. There are much better investment options
out there that can be helped selected by a professional (like me!). But for someone who
is on their own and unsure what to do, they are better than nothing.

I just rattled off 10 of the most common finance slang and jargon I see clients and prospects
unsure of what they mean. If you read through them, great! I only want these to be a resource
for you to feel as comfortable as possible if you ever met with me or anyone else for that matter.
Now you can show off these fancy new terms of yours at your next social gathering!