Retirement Account Modeler

Glossary

Plain-language definitions of the terms used in the modeler. These are general explanations for education, not advice for your situation; see Legal & privacy.

Account types

401(k) pre-tax (traditional): A workplace retirement plan where contributions come out of your pay before income tax. You pay ordinary income tax on withdrawals in retirement.
Roth 401(k): A workplace plan where contributions are taxed now but qualified withdrawals in retirement are tax-free.
Traditional IRA: An individual retirement account. Contributions may be tax-deductible depending on income and workplace plan coverage; withdrawals are taxed as ordinary income.
Roth IRA: An individual retirement account funded with after-tax money. Qualified withdrawals, including growth, are tax-free. Direct contributions are limited at higher incomes.
HSA (Health Savings Account): A tax-advantaged account paired with a high-deductible health plan. Contributions are deductible, growth is tax-deferred, and withdrawals for qualified medical costs are tax-free.
Brokerage (taxable) account: A regular investment account with no tax shelter. Dividends and realized gains are taxed along the way, but there are no contribution limits or withdrawal restrictions.
LIRP (Life Insurance Retirement Plan): A strategy using permanent life insurance (often indexed universal life) whose cash value can be accessed later through policy loans that are generally income-tax-free if the policy stays in force.
IUL (Indexed Universal Life): A type of permanent life insurance whose cash value growth is linked to a market index, subject to caps and floors set by the insurer.
SEP IRA: A retirement plan for the self-employed and small businesses. Only the employer contributes, up to a percentage of compensation.
Solo 401(k): A 401(k) for a business owner with no employees other than a spouse, allowing both employee deferrals and employer contributions.
Cash balance plan: A type of defined-benefit pension plan, often used by high-earning self-employed people, allowing large tax-deductible contributions that grow with a stated interest credit.

Contributions and strategies

Employee deferral: The portion of your own pay you elect to contribute to a workplace plan, up to the annual limit.
Employer contribution (match): Money your employer adds to your plan, often matching a percentage of what you contribute, limited by the annual compensation cap.
Catch-up contribution: Extra contributions allowed once you reach age 50 (and higher amounts at ages 60–63 in some plans). Higher earners must make 401(k) catch-ups as Roth.
Backdoor Roth IRA: Making a non-deductible traditional IRA contribution and then converting it to Roth, used when income is too high for direct Roth IRA contributions.
Mega backdoor Roth: Making after-tax (non-Roth) contributions to a 401(k) beyond the deferral limit and converting them to Roth. Requires a plan that allows after-tax contributions and in-plan conversion or in-service withdrawal.
Roth conversion: Moving money from a pre-tax account to a Roth account. The converted amount is taxed as ordinary income in the year of conversion, but future qualified withdrawals are tax-free.
Pro rata rule: An IRS rule that makes a Roth conversion partly taxable when you hold both pre-tax and after-tax money across your traditional IRAs; the conversion is treated as a proportional mix.
Cost basis: What you paid for an investment, used to figure the taxable gain when you sell. In a brokerage account, only the growth above basis is taxed.
Withdrawal order: The sequence in which you tap accounts in retirement (for example, taxable first, then pre-tax, then Roth). The order can materially change lifetime taxes.
Power of Zero: A framework popularized by David McKnight that aims to get retirees into the 0% tax bracket by shifting savings toward tax-free accounts before tax rates or RMDs rise.

Taxes

Federal marginal bracket: The tax rate applied to your next dollar of ordinary income. The U.S. system is progressive, so different slices of income are taxed at different rates.
Effective tax rate: Your total tax divided by your total income — the average rate you actually pay across all brackets.
Standard deduction: A fixed amount of income you can exclude from federal tax without itemizing. Most filers use it instead of itemized deductions.
Itemized deductions: Specific deductible expenses (such as mortgage interest, state taxes, and charitable gifts) claimed instead of the standard deduction when they add up to more.
FICA: Payroll taxes funding Social Security and Medicare, withheld from wages or paid as self-employment tax, separate from income tax.
QBI deduction: The qualified business income deduction, which lets many self-employed people and pass-through business owners deduct up to 20% of eligible business income.
Capital gains tiers: Long-term capital gains and qualified dividends are taxed at preferential rates (currently 0%, 15%, or 20%) depending on taxable income, instead of ordinary income rates.
NIIT (Net Investment Income Tax): An additional 3.8% tax on investment income such as interest, dividends, and capital gains for filers above certain income thresholds.
IRMAA: Income-Related Monthly Adjustment Amount — higher Medicare Part B and D premiums charged when your income from two years earlier exceeds set thresholds.
RMD (Required Minimum Distribution): The minimum amount you must withdraw each year from pre-tax retirement accounts starting at a set age. RMDs are taxed as ordinary income and can push you into higher brackets.
State income tax: Tax levied by your state of residence. Rates vary widely; some states have no income tax, and some exempt retirement income.
Social Security taxation: Depending on your combined income, up to 85% of Social Security benefits can be included in taxable income at the federal level.

Retirement income and spending

Social Security benefit: The monthly retirement benefit based on your earnings record. The model uses your estimated benefit at full retirement age (67).
Claiming age: The age you start Social Security. Claiming before full retirement age reduces the benefit; delaying past it increases it, up to age 70.
Spousal benefit: A Social Security benefit based on a spouse's earnings record, up to 50% of the higher earner's full-retirement-age benefit.
Trust fund shortfall: Projections that the Social Security trust funds may be depleted in the 2030s, after which ongoing payroll taxes would cover only part of scheduled benefits unless Congress acts. The model lets you test a benefit cut.
Inflation: The rate at which prices rise over time. The model uses it to grow expenses and to express results in today's dollars versus future dollars.
Today's dollars vs. future dollars: Today's (real) dollars strip out inflation so amounts are comparable to what money buys now; future (nominal) dollars show the actual number of dollars in a later year.
Return before / in retirement: The assumed annual investment growth rate while working versus after retiring. The model uses constant rates, which real markets do not deliver.
Long-term care: Ongoing help with daily activities later in life (home care, assisted living, nursing care). A major late-retirement expense that Medicare generally does not cover.
Health insurance before Medicare: Coverage you must buy yourself if you retire before Medicare eligibility at 65 — often a significant early-retirement cost.
Healthcare inflation: The rate at which medical costs rise, historically faster than general inflation. The model lets you set it separately.

Life insurance (LIRP) terms

Cash value: The savings component inside a permanent life insurance policy, which grows over time and can be accessed while you are alive.
Crediting rate: The interest rate the insurer applies to the cash value, often tied to an index with a cap and a floor in an IUL policy.
Policy costs: Insurance charges, administrative fees, and cost-of-insurance deductions taken from the policy, which reduce cash value growth.
Tax-free policy loan: Borrowing against the cash value instead of withdrawing it. Loans are generally not taxed as income while the policy stays in force, but unpaid loans reduce the death benefit and can cause a taxable lapse.
Annual premium: The amount paid into the policy each year. In the model, premiums fund the cash value that later supports loans.