Planning matters

DCA, ETFs, and TDFs, Oh My! Understanding Investment Jargon

If you’re like most people, the amount of investment acronyms and terminology out there can feel overwhelming. Fear not! Here is the first of two blog posts highlighting common words and abbreviations you may hear from the financial media—or your financial planner—explained in an easily digestible way. Today’s post breaks down common acronyms:

 

ETF: Exchange Traded Fund

ETF stands for ‘Exchange Traded Fund’. ETFs are a type of investment vehicle similar to mutual funds. They can hold a variety of underlying investments, including stocks, bonds, cash, etc., or a combination of these. Like mutual funds, ETFs are offered by investment companies, but unlike mutual funds, they trade in the market more like an individual stock, meaning their price can fluctuate throughout the day (mutual funds are only priced at the end of each day).

 

DCA: Dollar Cost Averaging

Another acronym that may ring a bell is DCA, which stands for ‘Dollar Cost Averaging’. DCA is a system of investing a fixed dollar amount on a recurring basis, regardless of the current market price. It’s a good way to develop a disciplined investing habit and take the emotion out of deciding whether to invest all at once or to try and ‘time the market’. For example, rather than invest $10,000 all at once, you may opt to invest $1,000 per month over ten months.

 

RMD: Required Minimum Distribution

Anyone with an Individual Retirement Account (IRA) who is 72 years or older must start taking distributions from their IRA on an annual basis. This mandatory disbursement is known as the ‘Required Minimum Distribution’, or RMD. The amount you must take is based on the value of your IRA on December 31 of the previous year, divided by a factor based on your age. Since the money in your IRA hasn’t been previously taxed, you’ll owe taxes commensurate with the amount you’re withdrawing and your tax bracket. (Bonus fact: If you thought the age requirement was 70 ½, you’re not crazy, the rules changed in 2019!)

 

QCD: Qualified Charitable Distribution

Many of our clients are charitably minded, but since the Tax Cuts and Jobs Act was passed in 2017, far fewer tax filers are itemizing, and therefore receive no tax benefit from their charitable donations. That’s where the ‘Qualified Charitable Distribution’ can potentially step in. Anyone with an IRA who is age 70 ½ or older can make charitable contributions directly from their IRA tax free! This can be especially useful for those age 72 and older who must take an RMD but don’t necessarily need those funds for their living expenses. Sending those distributions directly to charity instead can support the causes you care about while also potentially reducing taxable income. There are several nuances to using QCDs and we encourage you to talk to your planner to learn more about them if you’re interested.

 

Do you have certain terms in the financial world that always stump you? Send them our way and we’ll make sure to break them down in simpler terms in a future communication.