Jargon is a word that is thrown about with much vitriol across disciplines. Yet, above all other institutions, nothing gets brows furled more than the language of stocks, finances, retirement accounts, and investment. Something about this specific set of terms makes many young people unhappy at the entire state of affairs of the free market.
Yet, hidden behind years of layering of corporate meaning are fairly simple systems with strange but distinct names. Get to know the basics of specifically retirement account terms, and you can go far in calling marketers on their hijinks or even educating the family over Christmas dinner. The more you know about these kinds of systems, the better prepared you are to move forward with your own personal finances.
The Individual Retirement Account
What is an individual retirement account? Well, for one if you want to simplify the work your voice has to do, call it an IRA, and secondly, it’s a means of investing earnings you gain through employment to maximize investment gains through a potentially tax-deductible system.
Let’s start by breaking down the terms used here. Though you are earning the money put into the IRA, it’s designed for you to leave it alone until retirement. The minute you start taking it out, it starts being taxed. So, the idea is that you pay into this account over the course of your working life and get to take it out when you are old or otherwise in trouble.
This is what I mean by potentially tax-deductible. Though the money may not be fully free from this, putting it into an IRA has a number of financial advantages. One of the least apparent but most important is that it’s hard to access. IRAs can come in many forms, if you want to see an example, here are some Lear Capital reviews that explain fully the benefits of a gold IRA, aka using your IRA money to purchase physical precious metals.
This is a strange term that can be a bit endearing if your finances are complicated. Custodians are banks, insurance companies, or mutual fund companies (more on those later) who manage your money at a low level. You tell them what to do, they do it specifically. The shuffling of numbers that happens every single moment in the United States alone is all performed by institutions that can act as custodians.
What makes a formal custodian is a hazy concept, but it’s safe to say that most custodians are professionals that specialize in managing finances. Don’t worry too much about this, an accredited bank has its differences from those around it, but a bank is a bank. If you want to read more about how IRA money is managed by custodians, click here for the Wikipedia article that provides a great overview. It’s not perfect, but Wikipedia language is at least digestible.
Mutual Funds are a powerful force in modern finance. Put simply, they take the money and pool it for something more valuable such as shares in valuable companies. They buy what’s called securities, which is just a fancy term for a financial value or asset that you can trade. Mutual funds can be money market funds that invest into short-term debt from the US, hedge funds that split up finances to minimize risk, or other forms like stock funds and hybrid funds that can get infinitely complex.
If you have an ear for financial matters, you may have heard of a 401(k), which is specifically a form of mutual fund that is invested via your IRA. If your place of employment offers a 401(k), it’s a great thing and one of the best retirement accounts nowadays for simple and affordable investment into your future.
Basics for the Future
Even if you are confused here, think about it like this. An IRA is in general an account for the future. An IRA is also an individual account, from you for the future. You pay into it, and unless you take out of it, it’s not taxed. A 401(k) is a mutual fund that employers arrange with you. You both pay into it automatically and it grows in value over time. Both sets of accounts are worth having for their own reasons.
The jargon should seem a bit simpler now, and you can enter a retirement account meeting knowing that at the very least you know the basics. It’s worth noting that all of this is a generalization, and specifics are required for any decision. At the core, all financial language is just different ways of referring to the transfer of money, so never ever be afraid to ask questions of anyone who wants you to give them your money. Be safe out there, though there are plenty of legitimate retirement account services even the most secure services have their flaws, loopholes, and scams.