Glossary of Personal Savings Terms
Good personal financial plans involve personal savings plans, such as 401(k) accounts, 529s, and emergency funds. Some of these terms can be confusing, especially because they are often named after sections of tax code. Following are some of the most common personal savings terms.
A 401(k) is a type of retirement savings plan that you may have access to through your employer. Contributions to 401(k) plans are made pretax up to the government specified limit and can be matched if the employer chooses to do so.
A 403(b) is a similar type of account to a 401(k), but is for employees of nonprofits, schools, government agencies, and churches. While for profit employers can only have one 401(k) provider, with a 403(b), nonprofits can have multiple providers. Therefore, employees of nonprofits generally have more choices available to them. However, 403(b) plans typically have fewer investment options. Contributions to a 403(b) are made pretax up to the government specified limit and can be matched if the employer chooses to do so.
A 529 account is a savings account for college savings. Contributions are typically made on a post-tax basis, although some states do offer tax breaks for state taxes on such pre-tax contributions. Interest and dividends accrue tax free until the funds are withdrawn.
An emergency fund is a savings fund that all consumers should have. Generally recommended to contain about 3-6 months of income, an emergency fund is used to help in the case of a financial setback such as medical expenses or expensive car repairs.
FDIC (Federal Deposit Insurance Corporation) insurance guarantees deposits (up to the current limit of $250,000) made to member banks.
An IRA (individual retirement account) is an account you can open with a brokerage firm for your retirement savings. Each year, the government specifies a limit of contributions you can make on a pre-tax basis.