Definition A Deferred Compensation Plan is an arrangement between an employer and an employee that allows the employee to defer part of their income until a later date, typically until retirement. This can be a strategic financial tool for high earners who want to minimize their current tax burden while saving for the future.
Components of a Deferred Compensation Plan Deferral Amount: Employees choose how much of their income they wish to defer, which can be a fixed amount or a percentage of their salary.
Definition An Employee Stock Ownership Plan (ESOP) is a type of employee benefit plan that provides workers with an ownership interest in the company. It is a form of employee ownership that is designed to align the interests of employees and shareholders, motivating employees to contribute to the company’s success. ESOPs are unique because they are not just a retirement plan; they enable employees to own shares of the company, often at no upfront cost.
Definition A Money Purchase Pension Plan (MPPP) is a type of employer-sponsored retirement plan that requires fixed contributions to be made by the employer, usually expressed as a percentage of an employee’s salary. Unlike other pension plans that may have benefits tied to the employer’s financial performance, MPPPs offer a more predictable savings approach for retirement, as the contributions are predetermined.
Components of a Money Purchase Pension Plan Employer Contributions: Employers are required to make annual contributions to the plan, which is usually a fixed percentage of each participating employee’s salary.
Definition Non-Qualified Deferred Compensation (NQDC) Plans are arrangements that allow employees to defer a portion of their salary or bonuses until a later date, typically retirement. Unlike qualified plans, such as 401(k)s, NQDC Plans do not have to comply with IRS contribution limits or ERISA regulations, providing both employers and employees greater flexibility.
Key Components Deferral Amounts: Employees can choose how much they want to defer, which can be a percentage of their salary or a specific dollar amount.
Definition A profit sharing plan is a retirement plan that allows employers to contribute a portion of their profits to employee retirement funds. This plan not only helps employees save for their future but also promotes a sense of ownership and dedication to the company’s success. The contributions can vary from year to year, based on the company’s profits, making it a flexible option for both employers and employees.
Definition A UGMA custodial account, short for Uniform Gifts to Minors Act, is a financial account established to hold and manage assets for a minor until they reach the age of majority (usually 18 or 21, depending on the state). This account allows adults to make gifts to minors, which can be invested in a variety of financial instruments, including stocks, bonds and mutual funds.
The beauty of a UGMA custodial account lies in its ability to foster financial literacy and investment experience for a child, paving the way for a solid financial foundation as they transition into adulthood.
Definition A UTMA Custodial Account or Uniform Transfers to Minors Act account, is a financial vehicle that allows an adult to manage assets on behalf of a minor until they reach the age of majority, which varies from state to state. These accounts provide a way to transfer wealth while maintaining some control over how it is managed and spent. The account is established in the minor’s name and is controlled by a custodian, who is usually a parent or guardian.
Definition The Debt to Income Ratio (DTI) is a financial metric that measures an individual’s total monthly debt payments against their gross monthly income. It is expressed as a percentage and helps lenders assess a borrower’s ability to manage monthly payments and repay debts. The lower the DTI, the better, as it indicates a healthier financial situation.
Components of Debt to Income Ratio To calculate DTI, you will need to consider:
Definition The Quick Ratio, often referred to as the Acid-Test Ratio, is a financial metric that evaluates a company’s short-term liquidity. It measures the ability of a business to meet its short-term obligations using its most liquid assets, without relying on the sale of inventory. This metric is crucial for investors and stakeholders as it provides insight into the financial health of a company.
Components of the Quick Ratio Current Assets: These are assets that are expected to be converted into cash or used up within one year.
Definition Return on Assets (ROA) is a vital financial metric that gauges how effectively a company utilizes its assets to generate earnings. It is calculated by dividing a company’s net income by its total assets. This ratio provides insights into the efficiency of management in utilizing the company’s resources.
Importance of ROA Understanding ROA is crucial for investors, analysts and business owners. A higher ROA indicates more efficient use of assets, which can signal a well-managed company.