Terms

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2024 Income Tax Brackets

The tax rate you’re in for the highest dollar you earn. If you earn $160k in a year, you’re in the 24% tax bracket, i.e., your marginal rate is 24%.

Tax brackets for single filers, see here for other filers.

Marginal tax rate

How much your last dollar of earnings is taxed, which is based on the income tax brackets.

For example, if you earn $160k in a year, your marginal tax rate is 24%.

Effective tax rate

How much you are taxed on average taxed, which is based on the income tax brackets.

For example, if you earn $160k in a year, your effective rate is around 18.2%.

Check out this Federal Income Tax Calculator to find your effective tax rate in your state.

Capital gains

The amount that your investment has increased in value since you first purchased it. If VTSAX is currently $170 and you bought it at $130, you have $40 in capital gains.

Short-term capital gains

If you own an asset for one year or less before you sell it and you sell it for a profit, you’ll owe short-term capital gains.

Short-term capital gains are taxed as ordinary income, which means you’ll pay whatever your marginal rate is.

Long-term capital gains

If you own an asset for more than a year and sell it for a profit, you’ll owe long-term capital gains. The table below shows the rates for single filers, see here for other filers.

Backdoor Roth

The method to invest in a Roth IRA even if you earn over the income limits. This is done by opening a Traditional IRA and then performing a rollover to a Roth IRA.

See Backdoor Roth.

Mega Backdoor Roth

A method to invest up to $66k in a 401k, compared to the standard $23k.

See Mega Backdoor Roth.

SEPP 72(T) – Substantially Equal Periodic Payments

A way to withdraw funds from a 401k before age 59.5 by specifying standard amounts you will withdraw on a fixed schedule that you must follow until age 59.5

Dividends

The money that companies pay out for you holding their stock.

Ordinary dividends

These are taxed like ordinary income at your marginal rate when paid out in a brokerage account, as detailed in a 1099-DIV.

Qualified dividends

These are taxed similarly to capital gains when paid out in a brokerage account, as detailed in a 1099-DIV.

Brokerage account (after tax account)

An account where investments are made post-tax, gains are taxed, and sales are taxed.

See Brokerage account.

Pre-tax (before tax)

Money that is invested before it is taxed. You should try to invest as much money pre-tax as possible, as money is available to be invested and compound because taxes haven’t been taken from it.

Post-tax (after tax)

Money that is invested after taxes have been paid. You should focus on investing money pre-tax before investing money post-tax, as less money is available to be invested once taxes has been paid.

1099-DIV

The tax form you receive after the end of the tax year that details the taxes you owe on ordinary and qualified dividends paid out in a brokerage account, regardless of whether you sold and even if the dividends were reinvested.

Emergency fund

The account you hold cash in to cover a few months of expenses in case you lose your job or face an expensive payment like replacing a boiler.

See Emergency fund.

Interest rate

The percent you get paid back from investments. For example, a savings account may pay 4% interest rate, while stocks average 7% interest over time.

ESPP (Employee Stock Purchase Program)

An employee benefit that not enough employees take advantage of which allows them to purchase their company stock at a discounted price.

See ESPP.

FIRE

Financial Independence Retire Early; the movement that focuses on saving aggressively and investing in index funds until your investments return enough money to fund your living expenses.

See reddit.com/r/financialindependence

Index fund

A collection of individual stocks that represent a larger market, such as the S&P500 or the Total World Stock Index.

4% rule

The rule of thumb from the Trinity Study that says you can withdraw 4% of the amount invested in an index fund and it will last indefinitely. Important because it helps you understand what expenses your investments can cover, for example $1,000,000 invested allows for you to withdraw $40,000 indefinitely. In the study that analyzed withdrawing for 30 years, in 97% of cases the original investment amount didn’t drop to 0.

Take-home salary

The amount of money that you receive in your checking account from your salary after paying taxes. Also known as post-tax earnings.

Savings rate

The percent of your take-home salary that you save. For example, if you earn $130,000, take home $100,000, and save $40,000, your savings rate is 40%.

See Savings rate.

Employer match

The money that an employer contributes to your 401k based on what you contribute. Employers may do a 50% match where they contribute 50c for every $1 you invest.

Inflation

The name for when prices of goods rise, which happens when money becomes less valuable as there’s more money available from interest rates and there’s more demand for items.

HSA

A savings account for healthcare which can be used for retirement and allows tax free contributions, growth, and withdrawals.

See HSA.

Triple tax benefit

The term for triple benefits coming from an HSA account where you can achieve tax free (1) contributions, (2) growth, and (3) withdrawals, allowing you to maximize the money that’s available to be compounded over time.

Contributions

When you invest money in an account, this is known as a contribution.

When you purchase stock, the contribution is how much money you paid to purchase it.

Gains

The amount that your investment has increased in value since you first purchased it. If VTSAX is currently $170 and you bought it at $130, you have $40 in capital gains.

Related to capital gains.

Withdrawals

When you take money out of an account, this is known as a withdrawal. For example, withdrawing from a 401k when you access the money for retirement.

IRA

A savings account that has tax benefits, either no taxes on contributions or no taxes on contributions depending on whether it’s a Traditional IRA or a Roth IRA.

See IRA.

Traditional IRA (tIRA)

A savings account that offers tax free contributions, best for high earners who expect lower taxes in retirement, as you pay the tax when you retire in a lower bracket.

Roth IRA

A savings account that offers tax free withdrawals, best for low earners who expect higher taxes in retirement, as you pay the tax when contributing in a lower bracket.