401(k)… 403(b)… 501(c)3… it’s easy to see why so many people get confused about the alphabet soup that is modern financial vernacular. What was originally intended to help clarify the rules around different types of income and taxes has ballooned over the years into a numerical jumble that can leave many folks scratching their heads.
The good news is, only a handful of these terms are particularly relevant for most investors. Learning the basics of those can help dispel much of the confusion.
First, where did all these terms come from?
Each of these numbers corresponds to a different section of the Internal Revenue Code (IRC). The IRC refers to Title 26 of the U.S. Code, which is described in the preface as the official “consolidation and codification of the general and permanent laws of the United States.” Title 26 covers all relevant rules about income, gift, estate, sales, payroll, and excise taxes.
Although the IRC contains nearly a dozen different categories with over one million words, a few key sections pertain to retirement accounts, charities, college savings, real estate, and insurance. So, let’s take a look at each of these.
Understand retirement accounts
A 401(k) is a company-sponsored retirement account that lets employees contribute income and allows employers to match those contributions. There are two basic types – traditional and Roth – with the primary difference being how they are taxed. In a traditional 401(k), employee contributions are made…
