Financial Literacy Flashcard

A Traditional IRA (Individual Retirement Account) is a type of retirement savings account that allows individuals to make contributions with pre-tax income, meaning taxes are paid upon withdrawal during retirement.

A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to save a portion of their paycheck before taxes are taken out, with taxes due upon withdrawal.

Pre-tax contributions are made before income taxes are deducted, reducing taxable income in the year of contribution. Post-tax contributions are made after taxes, meaning no tax deduction is received.

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

Diversification reduces investment risk by spreading investments across various financial instruments, industries, and other categories to minimize the impact of any single asset's poor performance.

An indexed fund is a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific index, such as the S&P 500, by holding the same stocks in the same proportions.

The future value (FV) can be calculated using the formula: FV = P(1 + r)^n, where P is the principal amount, r is the annual interest rate, and n is the number of years.

The tax rate during retirement affects how much of the withdrawn amount is kept after taxes. A lower tax rate in retirement can result in more money retained compared to a higher tax rate.

The rule of 72 is a formula used to estimate the number of years required to double the investment at a fixed annual rate of return by dividing 72 by the annual interest rate.

A stock investment club is a group of individuals who pool their money to invest in stocks, allowing members to learn about investing, share knowledge, and reduce individual risk.