What's the difference between a 401K and an IRA? What does Keogh mean?
Learn the meaning of investment terms.
We know: 10 Investment Terms You Should Know
Here are the definitions of 10 types of investments.
- Money Market Deposit Accounts. These accounts usually earn slightly higher interest than a savings account but still allow easy access to your money. Some banks and financial institutions require an initial deposit of $1,000 or more and limit the number of withdrawals or transfers you can make during a given period of time.
- CDs (Certificates of Deposit). CDs usually earn more interest than a savings account and are a very low-risk financial vehicle. They are generally insured up to $100,000 by the FDIC for all deposits at one institution. You agree to keep your money on deposit for a fixed period of time. Usually, the longer the term, the higher the interest rate. There may be penalties for early withdrawal.
- 401(k) Plans. If your employer offers a 401(k) plan, it may be one of the best retirement vehicles available to you. A 401(k) is a retirement savings plan to which you can contribute a certain percentage of your gross income. Typically with a 401(k) plan you have several investment options from which to choose, including stocks, bonds, mutual funds or CDs.
- 403(b) Tax Sheltered Annuities (TSAs). Similar to a 401(k) plan, TSAs are retirement plans for nonprofit organizations such as schools, hospitals or social service agencies. These plans allow you to set aside a portion of your pay on a pretax basis and the money invested in a TSA grows free from taxation until such time as you withdraw the money.
- Individual Retirement Arrangements (IRAs). IRAs were established to encourage people to save for retirement. Your annual contribution may also be fully or partially deductible, depending on your income level and whether you are covered by another retirement plan. You may have a choice of investment options for your IRA, including stocks, bonds, mutual funds or CDs. Keep in mind that your money must be in an IRA-approved account and that it must be designated as an IRA.
- Keogh Plans. Keoghs are retirement plans for people who are self-employed. Usually a maximum of 25% of your net income (or a maximum of $40,000) can be contributed to these plans on a tax-deferred basis. Keoghs are more complicated than an IRA, 401(k) or 403(b), so get tax advice before setting up a plan.
- Stocks. When you buy stocks, you acquire shares of a company's assets. If the company does well, you may receive periodic dividends and/or be able to sell your stock at a profit. If the company does poorly, the stock price may fall and you could lose some or all of the money you invested.
- Bonds. When you purchase a bond, you are essentially loaning money to a corporation, the U.S. government or a local government for a certain period of time, called a term. The bond certificate promises that the issuing entity will repay you on a specified date with a fixed rate of interest. Bond terms can range from a few months to 30 years.
- Mutual Funds. A mutual fund is generally a professionally managed pool of money from a group of investors. A mutual fund manager invests your funds in securities, including stocks and bonds, money market instruments or some combination and decides the best time to buy and sell. By pooling your resources with other investors in a mutual fund, you can diversify even a small investment over a wide spectrum, which should reduce risk.
- Annuities. Annuities may be deferred or immediate. Both are financial contracts you make with an insurance company. A deferred annuity helps you accumulate money for retirement, while an immediate annuity provides you with a steady stream of retirement income in return for your money. With a deferred annuity you put money in, and over time it accrues income and interest. The payout occurs at some later date. Immediate annuities are usually purchased with one lump sum payment and then begin an immediate payout.