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What the ABC? A Guide to Understanding Financial Acronyms

By: Brittany Komorowski, CFP ®, EA 

In the wide world of finance, there are many terms and strange words you need to know. To make matters worse, they often turn these complicated words into acronyms that leave most scratching their head. Deciphering them is definitely not as easy as ABC. To help prepare you for your next financial conversation, below I’ve listed out a few financial acronyms and their meaning. After reading this list, I hope you feel ready to slur the letters of the alphabet with confidence regarding your finances.

IRA (aka Individual Retirement Account)- This is a type of tax deferred retirement account that you own individually. This is an account that holds investments and is funded with pre-tax dollars. You must pay tax on the money you withdraw from an IRA. A common way to fund this is with a rollover from your retirement account from when you are working.

RMD (aka Required Minimum Distribution) This is the mandatory amount you must take from your IRA account once you reach age 70.5. The amount you must take is determined by a formula that uses your age and account value.

QCD (aka Qualified Charitable Distribution) This is a charitable donation you make directly from your IRA account. The distribution comes out tax free from an account you normally have to pay taxes on. This is a great tax savings tool.  However, you must be 70.5 in order to do this.  

UTMA (aka Uniform Transfers to Minors Act) These are a type of investment account that allows you to gift money to a minor. These accounts allow the minor to avoid tax consequences and allows the donor to control the investments until they reach legal age. Once the child reaches legal age, these accounts are transferred to them.

HSA (aka Health Savings Account) These are a type of tax-advantaged accounts that allow you to save money for medical expenses. You must have a high deductible health plan in order to use this account and distributions must be used to pay qualified medical expenses. Yourself or your employer may contribute to an HSA.

HRA (aka Health Reimbursement Arrangement) This is an account your employer funds for you to use for un-reimbursed health expenses.

AGI (aka Adjusted Gross Income) This is a number found on your tax return. It equals the total of your income minus any adjustments to income. For example, common adjustments that are subtracted to determine your AGI are HSA or IRA contributions, or student loan interest. In 2018, your AGI was listed on line 7 of the 1040.

POA (aka Power of Attorney) This is a type of legal document that allows you to nominate someone to act on your behalf while you are still living but unable to do so. There are financial power of attorney documents and healthcare power of attorney documents.

TOD/POD (aka Transfer on Death or Payable on Death) This is a type of beneficiary designation you can add to certain assets that allows the asset to pass directly to whom you name. It is a tool to use to avoid probate.

As you can see, financial acronyms are not as easy as ABC! However, after reading this, I hope you feel empowered to discuss your finances with ease.  

Liberty Financial Group, Inc