Know what you own
Making sense of financial word salad
A friend recently sent me an investment ad … the tagline "Create Passive Losses with Syndication investments—Paper Losses equal real savings…"
After a few questions about the investment, I realized it was some slick marketing, but there was no information about the investment or how all the paper losses would one day equate to real wealth. Discussing this with my friend solidified my resolve that you need to understand everything you own. Owning financial products you don't understand leads to unknowns in your portfolio risk level.
Know what you have
Let's start by building out your cash flow statement and account review. Click here for my post on how to do that in simple steps.
Now, you can go through every investment and figure out what type of account it is, what type of investment it is, and how each works. Use the following glossary to understand what you have. If you have something not listed below, send it to me, and I will add it. If you don't know how it works, message me, and we can discuss it.
Let's go ahead and get started. This list is not comprehensive, but it does list common investments that folks I talked to own in their accounts.
Accounts
Education
529 Plan: A tax-advantaged savings plan for education expenses. You can create a 529 account and have the beneficiary (the one you will use the funds for) be a family member. The account is yours to control, and you can change the beneficiary anytime. All earnings on the account grow tax-free (at the federal level) when used for qualified education costs. Every state has a different treatment of 529 plans. Some states will recognize the contribution as a tax deduction. Other states recognize 529 plan distributions as taxable income (NJ and CA in 2025). Check your plan and state rules before opening an account.
Coverdell ESA: Tax-advantaged education savings account for K-12 and higher education expenses. You can contribute up to $2,000 each year.
Custodial Account (UGMA/UTMA): An account held in a minor's name but managed by an adult until the child reaches adulthood. This account is not tax-advantaged like the 529 or Coverdell, and is taxed following the Kiddie Tax rules. There is no restriction on what the funds are used for. Once the minor reaches adulthood (age 18 or 21, based on state guidelines), they have complete control of the account.
Healthcare
Medical FSA: Employer-sponsored account that allows pre-tax contributions to be used for medical, dental, and vision expenses within the plan year. This account is a use-it-or-lose-it account; spend it completely, preferably by the end of the calendar year. (Though some plans have a grace period.)
Dependent Care FSA: Employer-sponsored, allows pre-tax contributions to be used for childcare or adult dependent care expenses, including daycare, before-care, aftercare, and summer camp programs. You can also use a dependent care FSA for care programs for elderly parents you support. Be sure to check your plan’s reimbursement rules for provider qualification.
HSA (Health Savings Account): A tax-advantaged account for medical expenses. You can qualify to start an HSA as part of a High-Deductible Health Insurance Plan. The contribution to the plan is tax-free, the growth is tax-free, and the distributions are tax-free as long as you use the distributions to pay for medical expenses, including Medicare premiums.
EOB (Explanation of Benefits): Insurance provider documents detailing medical service costs and coverage. After a doctor's visit, you can review your EOB to understand your coverage, the amount you applied to your deductible, and your remaining responsibility. You can use your EOB when contesting a claim with the insurance company.
Limited Purpose FSA: This is often used alongside an HSA account; this limited FSA is restricted to only dental and vision expenses.
Retirement
Defined Contribution Plan: A defined contribution plan is a retirement plan where employees and sometimes employers contribute a specified amount or percentage of money to an individual account for the employee. The final benefit depends on the contribution amounts, investment performance, fees and expenses, and withdrawal timing. The investment risk falls on the employee, as there's no guaranteed benefit amount at retirement. Common examples include: 401(k) plans, 403(b) plans, 457 plans, and Individual Retirement Accounts (IRAs).
Defined Benefit Plan: A defined benefit plan is a traditional pension plan that provides employees with a guaranteed, predetermined benefit at retirement. The benefit amount is typically calculated using a formula that considers years of service, salary history, and age at retirement. With these plans, the employer bears the investment risk and ensures sufficient funds are available for the promised benefits. A common example of this is a pension.
Traditional IRA: A tax-deferred retirement account where contributions might be tax-deductible, but withdrawals are taxed as ordinary income in retirement. Contributing to a traditional IRA reduces your taxable income now. Later, in retirement, you can withdraw from the IRA and pay taxes at your retirement tax bracket (which may be lower). You will face a 10% penalty if you take out any gains before 59.5.
Roth IRA: A retirement account funded with after-tax dollars; contributions are not tax-deductible, but qualified withdrawals in retirement are completely tax-free. If you are currently in a lower tax bracket, paying the tax now may be beneficial to have that money completely tax-free in retirement (where it may be higher than your current bracket). You can withdraw contributions anytime (after the account has been open for five years). You will face a 10% penalty if you take out any gains before 59.5.
401(k): An employer-sponsored retirement plan that allows employees to contribute pre-tax earnings, often with employer-matching contributions. You pay taxes on principal and gains upon withdrawal. As with the Traditional RA, distributions under 59.5 will face a 10% penalty.
Roth 401(k): A variation of the traditional 401(k) where contributions are made with after-tax dollars, but qualified withdrawals are tax-free in retirement.
403(b): A tax-advantaged retirement plan like a 401(k), but specifically for employees of public schools, certain non-profits, and tax-exempt organizations.
457(b): Deferred compensation plan for state and local government and certain non-profit employees. To contribute, you defer part of your salary into a 457(b) plan, to be paid later. The added benefit is that you can withdraw before age 59½ and do not face the 10% penalty typical of other retirement plans.
Solo 401(k): A 401(k) plan for self-employed individuals without employees. This plan helps independent consultants find low-cost retirement savings options.
SIMPLE IRA: (Savings Incentive Match Plan for Employees) A retirement plan for small businesses with 100 or fewer employees that allows both employer and employee contributions with simpler administration but the same rules as a 401(k).
SEP IRA: (Simplified Employee Pension) A retirement plan primarily for self-employed individuals or small business owners where employers make tax-deductible contributions to employee accounts.
Cash Balance Plan: A plan that functions like a defined contribution plan. You (or the company) contribute to the plan, and you will grow the cash balance to be paid out as an annuity or lump sum when disbursed.
Pension Plan: A traditional defined benefit plan where employers promise specific retirement benefits based on salary history and years of service. Currently, most companies don’t have pension plans, and those that do are usually found in government and state positions (police, teachers, military, etc.).
This is getting long, I will add more in my next post.
Understanding what you own helps me make informed decisions about investing. Ultimately, you are the only one responsible for your financial decisions; take that responsibility seriously at all stages of your financial journey.