Personal finance — C2 (US tax, retirement, portfolio)

US personal finance has its own dense vocabulary, partly because the US tax code is unusually complex and partly because the US has unusually granular tax-advantaged retirement-account architecture. A C2 reader navigates capital gains vs ordinary income, the marginal vs effective tax rate, the difference between deductions and credits, itemizing vs the standard deduction, the AGI-MAGI-taxable income chain, the AMT parallel system, and the alphabet soup of retirement accounts (401(k), 403(b), 457(b), Traditional IRA, Roth IRA, SEP IRA, SIMPLE IRA, HSA, FSA). The FIRE community (Financial Independence, Retire Early), the Bogleheads index-fund subculture, and the r/personalfinance / r/bogleheads / r/financialindependence online communities have produced a popular-financial vocabulary that is increasingly cited by mainstream financial journalism.

This lesson is not financial advice. It is a vocabulary map. By the end you can read Morningstar, the Bogleheads forum, Mr. Money Mustache, the White Coat Investor, the Mad Fientist, ChooseFI, and the Journal of Financial Planning’s lighter pieces without translation.

The structure: (1) the US tax architecture, (2) retirement accounts, (3) portfolio construction, (4) advanced tax planning, (5) the FIRE/financial-independence register.

The US tax architecture — the conceptual core

The federal income-tax flow

The US tax computation flows through a fixed sequence of subtotals; vocabulary attaches at each step.

1. gross income — all income from all sources.
2. above-the-line deductions — subtractions to get to AGI (HSA contribution, traditional IRA contribution, student-loan interest, etc.).
3. AGI (Adjusted Gross Income) — the central reference number; many phase-outs are AGI-based.
4. the standard deduction or itemized deductions — the larger reduces taxable income; standard is 14,600 (single) / 29,200 (MFJ) in 2024 dollars; itemize if SALT + mortgage interest + charitable > standard.
5. QBI deduction (Qualified Business Income, \§199A) — pass-through-business deduction.
6. taxable income — what the brackets apply to.
7. the tax brackets — marginal-rate ladder (10/12/22/24/32/35/37% currently).
8. the tax liability — what brackets produce before credits.
9. credits — direct reductions of liability (Child Tax Credit, EITC, foreign tax credit, etc.).
10. the AMT computation — parallel system; pay the higher of regular tax or AMT.
11. withholding and estimated payments — what you’ve already paid.
12. refund or balance due.

Key terms:

• gross income — total before any subtraction.
• AGI (Adjusted Gross Income) — IRS form 1040, line 11; the key reference.
• MAGI (Modified Adjusted Gross Income) — AGI plus certain add-backs; varies by use case (Roth IRA contribution limit, IRMAA Medicare surcharges, ACA premium credit each have different MAGI definitions).
• taxable income — what’s left after deductions.
• marginal tax rate — rate on the next dollar of income.
• effective tax rate — total tax divided by total income; lower than marginal.
• the bracket — the income range corresponding to one marginal rate.
• bracket creep — being pushed into higher brackets by inflation (mitigated since 1986 by indexed brackets).
• the standard deduction — flat amount based on filing status.
• itemized deductions — specific expense categories (Schedule A: SALT, mortgage interest, charitable, medical above 7.5% AGI).
• SALT (state and local taxes) — capped at $10,000 (TCJA, 2017); famously contentious in high-tax states.
• the SALT cap — same.
• bunching — concentrating itemizable expenses into alternate years to exceed standard deduction.
• a tax deduction — reduces taxable income; value = amount × marginal rate.
• a tax credit — reduces tax liability directly; $1 credit = $1 tax saved.
• refundable credit vs non-refundable credit — refundable can reduce liability below zero (you get money back); non-refundable bottoms out at zero.
• the EITC (Earned Income Tax Credit) — major refundable credit for low-to-moderate income workers.
• the CTC (Child Tax Credit) — per-child credit.
• tax-deferred — pay tax later (traditional 401(k)/IRA).
• tax-free — never pay tax (Roth, HSA for qualified medical, 529 for qualified education).
• tax-advantaged — umbrella for both.

Capital gains and qualified dividends

The most C2-relevant distinction in US personal-finance vocabulary.

• ordinary income — wages, salary, interest, non-qualified dividends, short-term capital gains, etc.
• capital gains — profit from sale of a capital asset.
• short-term capital gains (STCG) — assets held ≤1 year; taxed as ordinary income.
• long-term capital gains (LTCG) — assets held >1 year; taxed at the preferential rates (0/15/20%).
• qualified dividends — paid by US corporations and certain foreign corporations; taxed at LTCG rates.
• non-qualified / ordinary dividends — taxed as ordinary income.
• the 0% LTCG bracket — for taxable income up to roughly $47k single / $94k MFJ in 2024.
• the 15% LTCG bracket — most taxpayers.
• the 20% LTCG bracket — for highest incomes.
• the 3.8% NIIT (Net Investment Income Tax) — surtax on investment income above MAGI $200k single / $250k MFJ.
• the wash-sale rule — disallows loss recognition if you buy substantially identical security within 30 days before or after the sale.
• basis / cost basis — original purchase price; what gain/loss is measured from.
• adjusted basis — basis + improvements, etc.
• stepped-up basis — at death, heirs’ basis becomes the date-of-death value; pre-death gains escape income tax.
• the step-up at death — same; a major intergenerational tax planning consideration.
• carryover loss — capital losses above $3,000/yr ($1,500 if MFS) that carry forward to future years.
• the $3,000 annual loss limit — capital losses can offset only $3,000 of ordinary income per year (excess carries).
• harvesting — deliberately realizing gains or losses for tax purposes.

“The preferential rates on long-term capital gains and qualified dividends are the most consequential structural feature of the US individual tax code; they explain why high earners with portfolio income often pay lower effective rates than wage earners several brackets below.” — Tax Foundation, 2023.

The AMT and the parallel system

• AMT (Alternative Minimum Tax) — parallel tax system with its own rules; you pay the higher of regular tax or AMT.
• AMTI (Alternative Minimum Taxable Income) — AMT’s version of taxable income.
• the AMT exemption — a substantial standard amount ($85,700 single / $133,300 MFJ in 2024) that phases out at high incomes.
• the AMT rates — 26% on AMTI up to $232,600, 28% above.
• ISO exercise and AMT — incentive stock options on exercise create an AMT “preference item” — a common AMT trigger.
• the AMT credit — AMT paid (on timing items like ISO exercises) can generate a credit usable in future years against regular tax.
• the TCJA’s AMT reforms — the 2017 Tax Cuts and Jobs Act raised exemptions and reduced AMT applicability; most middle-upper earners no longer trigger AMT.

Retirement accounts — the US alphabet soup

Employer-sponsored

• 401(k) — private-sector employer-sponsored DC (defined contribution) plan.
• 403(b) — same idea, for public-school and nonprofit employees.
• 457(b) — government-employee deferred-compensation plan; can be stacked with 401(k)/403(b).
• TSP (Thrift Savings Plan) — federal employee version.
• the employer match — percentage of employee contribution matched by employer.
• vesting schedule — when employer match becomes yours (cliff vs graded).
• safe harbor 401(k) — must fully vest match.
• the contribution limit — $23,000 employee 2024 ($30,500 with catch-up); often increases for inflation.
• catch-up contributions — age-50+ extra ($7,500 in 2024 for 401(k)).
• traditional 401(k) — pre-tax contribution, taxable withdrawal.
• Roth 401(k) — after-tax contribution, tax-free withdrawal.
• the after-tax 401(k) / the non-Roth after-tax bucket — separate bucket allowing mega-backdoor Roth.
• the total 401(k) limit (\§415(c)) — $69,000 in 2024 (employee + employer + after-tax).
• in-service withdrawal — withdrawal while still employed; required for in-plan Roth conversion of after-tax dollars.

IRAs (Individual Retirement Accounts)

• Traditional IRA — pre-tax (if deductible); taxable withdrawal.
• Roth IRA — after-tax contribution; tax-free qualified withdrawal.
• Rollover IRA — IRA holding rolled-over 401(k) money.
• SEP IRA (Simplified Employee Pension) — self-employed/small-business plan; up to 25% of comp, max $69,000 (2024).
• SIMPLE IRA — small-business plan; lower limits, simpler administration.
• the IRA contribution limit — $7,000 (2024), $8,000 with catch-up (50+).
• deductibility phaseout — Traditional IRA deduction phases out at moderate incomes if covered by employer plan.
• Roth IRA income limits — direct contribution phases out at MAGI $146-161k single / $230-240k MFJ (2024).
• the backdoor Roth — nondeductible Traditional IRA contribution + immediate conversion to Roth; sidesteps income limits.
• the pro-rata rule — IRA conversions are taxed proportionally based on pre-tax balance across all your IRAs; complicates backdoor Roth if you have other pre-tax IRA balances.
• the mega-backdoor Roth — after-tax 401(k) contributions converted to Roth (in-plan or via rollover); huge if your plan allows.
• the conversion ladder — multi-year strategy of converting Traditional to Roth at favorable tax rates, especially in low-income early-retirement years.
• the Roth conversion — moving Traditional balance to Roth; taxable in the year of conversion.
• basis tracking (Form 8606) — required for nondeductible contributions.

HSA and 529

• HSA (Health Savings Account) — triple tax-advantaged: deductible contribution, tax-free growth, tax-free qualified medical withdrawal. Available if covered by HDHP.
• HDHP (High-Deductible Health Plan) — required for HSA eligibility.
• the HSA contribution limit — $4,150 single / $8,300 family (2024), $1,000 catch-up at 55+.
• HSA receipt-stacking — paying medical out-of-pocket, keeping receipts, reimbursing yourself later — letting HSA grow tax-free.
• 529 plan — state-sponsored college-savings plan; after-tax in, tax-free out for qualified education.
• the 529-to-Roth rollover — new (SECURE 2.0); $35,000 lifetime, 15-year-old account.
• superfunding a 529 — five-year accelerated gift contribution.

RMDs and timing

• RMD (Required Minimum Distribution) — required withdrawals from Traditional 401(k)/IRA starting age 73 (will move to 75).
• the RMD age — 73 currently (raised from 70.5 to 72 to 73 by SECURE Act and SECURE 2.0).
• Roth RMDs — none for Roth IRA owners; from 2024 onward, no RMDs on Roth 401(k) either (SECURE 2.0).
• QCD (Qualified Charitable Distribution) — direct IRA-to-charity transfer satisfying RMD without income inclusion.

“The contribution-limit and conversion architecture of US retirement accounts is, in aggregate, one of the most generous high-earner tax shelters in the OECD; it just happens to look modest because each piece is named separately and the assembly is left to the taxpayer.” — Bogleheads Wiki, 2024.

Portfolio construction — the Boglehead canon

• asset allocation — the mix across asset classes (stocks, bonds, cash, real estate, etc.).
• strategic asset allocation — long-term target.
• tactical asset allocation — short-term deviations.
• the efficient frontier — Markowitz’s optimal risk/return curve.
• mean-variance optimization — the math behind it.
• modern portfolio theory (MPT) — Markowitz framework.
• the three-fund portfolio — Total US Stock Market + Total International + Total Bond Market; the Boglehead standard.
• the two-fund — Total World + Total Bond.
• the lazy portfolio — minimal-rebalancing, low-cost.
• the target-date fund (TDF) — single-fund all-in-one that glides from stocks to bonds.
• the glide path — the TDF’s stock-to-bond shift over time.
• the expense ratio — annual fund fee, expressed as % of assets.
• the basis point (bp) — 1/100 of 1%; 15 bps = 0.15% expense ratio.
• passive vs active management — index vs stock-picking.
• the index fund — tracks a benchmark.
• the ETF (Exchange-Traded Fund) — index fund traded intraday on exchange.
• the mutual fund — pooled investment; priced once daily at NAV.
• NAV (Net Asset Value) — per-share fund value.
• the bid-ask spread — buy-sell price gap.
• the tracking error — fund’s deviation from its benchmark.

Rebalancing

• rebalancing — periodic adjustment back to target allocation.
• calendar rebalancing — at fixed intervals (annually, quarterly).
• threshold rebalancing — when allocations drift by some % from target.
• bands — the deviation thresholds (e.g., 5/25 bands: 5 absolute pp or 25% relative).
• rebalancing premium — small return enhancement from buy-low-sell-high mechanics.
• the tax cost of rebalancing — selling appreciated positions triggers gains; rebalance with new contributions or in tax-advantaged accounts to avoid.

Diversification and risk

• diversification — spreading risk across uncorrelated assets.
• systematic risk / market risk — non-diversifiable.
• idiosyncratic risk / specific risk — diversifiable.
• the equity risk premium — long-run excess return of stocks over bonds.
• the small-cap premium / the value premium — Fama-French factors.
• factor investing — tilting toward known risk premia.
• the four-factor model (Fama-French + Carhart momentum).
• smart beta — factor-based index investing.
• home bias — over-weighting domestic equities; usually treated as suboptimal.
• correlation — how assets move together.
• the correlation breakdown — diversifiers correlate in crises (2008).
• drawdown — peak-to-trough decline.
• the maximum drawdown — worst observed historical drawdown.
• volatility — standard deviation of returns.
• the Sharpe ratio — return per unit of total risk.
• the Sortino ratio — return per unit of downside risk.

Withdrawal strategy and sequence risk

The financial-independence-era vocabulary.

• the safe withdrawal rate — the rate at which a portfolio is highly likely to survive a given period.
• the 4% rule (Bengen, 1994; Trinity Study, 1998) — 4% of starting portfolio, inflation-adjusted, survived all historical 30-year periods.
• the Trinity Study — Cooley, Hubbard, Walz (1998) extension of Bengen.
• SAFEMAX — Bengen’s term for the historical maximum-safe rate (later refined to ~4.5%).
• the 25x rule — 25× annual expenses = the FIRE target (inverse of 4%).
• sequence-of-returns risk (SORR) — the risk that bad returns early in retirement deplete capital permanently.
• sequence risk — same.
• dollar-cost averaging (DCA) — investing fixed amounts at intervals.
• lump-sum investing — putting it all in at once; statistically beats DCA on average but worse in left-tail scenarios.
• the bucket strategy — short-term cash bucket, medium-term bond bucket, long-term equity bucket.
• the bond tent / the rising equity glide path (Kitces & Pfau) — increase stock allocation post-retirement to mitigate SORR.
• the cash cushion — short-term reserve to avoid selling stocks during drawdowns.
• the floor-and-upside strategy — guaranteed income for essentials + growth assets for upside.
• annuities — insurance products converting principal to guaranteed lifetime income.
• SPIA (Single Premium Immediate Annuity) — pay lump sum, start income immediately.
• DIA (Deferred Income Annuity).
• the mortality credit — the extra return on annuities from pooling longevity risk.

“Sequence-of-returns risk is the asymmetry retirement planners spend the most time mitigating: a 30% portfolio decline in year three of retirement is materially different from the same decline in year twenty-five, even though both look identical in a Monte Carlo summary statistic.” — Journal of Financial Planning, 2023.

Advanced tax planning

• tax-loss harvesting (TLH) — realizing losses to offset gains and (up to $3k) ordinary income.
• the harvesting partner — a similar-but-not-identical security to swap into without triggering wash sale (VTI ↔ ITOT, etc.).
• the substantially identical standard — IRS-vague; the practical workaround is using different fund families’ total-market funds.
• gain harvesting — realizing gains in the 0% LTCG bracket, then re-buying to step up basis tax-free.
• asset location — placing tax-inefficient assets (bonds, REITs) in tax-deferred accounts, tax-efficient (US stocks) in taxable.
• the location alpha — return enhancement from asset location.
• the donor-advised fund (DAF) — charitable vehicle: deduct contribution now, grant out over time.
• bunching charitable — alternating years of large vs zero charitable to exceed standard deduction.
• appreciated-stock charitable donation — donate stock; deduct fair-market value, avoid LTCG on appreciation.
• a like-kind exchange (\§1031) — defer gain on real-estate exchanges; restricted to real property since TCJA.
• the qualified opportunity zone (QOZ) — deferral and exclusion vehicle for capital-gains reinvestment in designated zones.
• carryforwards — losses, credits, deductions usable in future years.
• the NOL (Net Operating Loss).
• passive activity loss rules — limits on rental-real-estate loss deduction.
• the real estate professional designation — qualifies for full PAL deduction.
• depreciation recapture — selling depreciated real estate; depreciation taken is recaptured at up to 25%.
• \§121 exclusion — $250k single / $500k MFJ capital-gain exclusion on primary residence sale.

The FIRE community vocabulary

• FIRE (Financial Independence, Retire Early) — the movement.
• financial independence (FI) — assets sufficient to cover expenses indefinitely.
• lean FIRE — FI with frugal lifestyle (~$25-40k/yr).
• fat FIRE — FI with comfortable lifestyle ($100k+/yr).
• coast FIRE / coast FI — enough invested to grow to FI by retirement without further contributions.
• barista FIRE — FI plus part-time work for healthcare.
• the FIRE number — annual expenses × 25.
• the savings rate — % of income saved/invested.
• the time-to-FI formula (Mr. Money Mustache) — savings rate maps to years to FI.
• early retirement — pre-Social Security retirement.
• the SEPP / 72(t) distributions — substantially-equal periodic payments; access pre-59½ retirement-account money without penalty.
• the Rule of 55 — penalty-free 401(k) access if separated from service in or after the year you turn 55.
• the Roth conversion ladder — multi-year Traditional-to-Roth conversion strategy; converted amounts withdrawable after 5 years.
• die with zero (Bill Perkins) — counter-FIRE philosophy emphasizing experience spending over excessive accumulation.

“The FIRE movement made personal-finance vocabulary go viral, but the substantive teaching has always been more boring than the brand: spend less than you earn, invest the difference in low-cost index funds, and let compounding do its work.” — NYT, 2023.

AmE-specific finance vocabulary

Collocations

• a tax-advantaged account / vehicle / strategy
• a tax-deferred balance / contribution
• a tax-free withdrawal / distribution
• a taxable brokerage account / event / transaction
• a qualified dividend / distribution / withdrawal
• a non-qualified withdrawal / distribution
• a Roth-eligible plan / contribution / conversion
• a low-cost index fund / portfolio
• a high-cost active fund / wrap account / annuity
• a diversified portfolio / allocation
• a concentrated position / portfolio (often risky)
• a tax-efficient fund / portfolio / strategy
• a tax-inefficient asset (high-yield bonds, REITs in taxable)
• to max out a 401(k) / IRA / HSA
• to front-load contributions
• to backdoor a Roth
• to mega-backdoor a Roth
• to harvest losses / gains
• to rebalance the portfolio
• to convert to Roth
• to recharacterize (a contribution; no longer allowed for conversions post-2017)
• to roll over a 401(k) into an IRA
• to take an RMD / satisfy the RMD
• to itemize / to take the standard

Phrases and locutions

• time in the market beats timing the market — Boglehead mantra
• stay the course — Bogle’s slogan
• don’t fight the Fed — Wall Street saw
• don’t catch a falling knife — same
• buy and hold — passive philosophy
• set it and forget it — same
• the cost of waiting / opportunity cost — argument for lump-sum
• paying yourself first — automating savings before spending
• the latte factor (David Bach) — small daily expenses adding up; now widely debunked as the main driver
• the snowball method vs the avalanche method — debt-payoff strategies (smallest first vs highest-rate first)
• the F-you fund — emergency cushion enabling job-quitting flexibility
• the emergency fund — typical 3-6 months expenses
• golden handcuffs — compensation that makes you stay
• the wealth effect — spending more when assets are up
• chasing yield — taking on risk for returns

Common Russian-speaker mistakes

1. *Pension* for retirement account broadly. Russian пенсия maps to pension. AmE: pension = defined-benefit (DB) plan promising monthly payments based on years of service; rare in the US private sector since c. 1990. The standard US retirement-account is a 401(k) or IRA — defined-contribution, no guaranteed payout. I’m saving for my pension is wrong for most US workers; I’m saving for retirement / contributing to my 401(k) is right.
2. *Salary* for any income. Russian зарплата is broad. AmE: salary = annual fixed pay for exempt employees; wages = hourly pay for non-exempt; compensation = umbrella (includes equity, bonus); income = umbrella for all sources (including investment, rental, business). My salary is from dividends is wrong; my income is from dividends is right.
3. *Percent* vs *basis point*. Russian процент is unmarked. AmE finance differentiates: a percent is 1/100; a basis point (bp) is 1/100 of 1% = 0.01%. Fund expense ratios are typically discussed in basis points: 15 bps = 0.15%. The expense is 15 percent is wildly wrong; the expense is 15 basis points is right.
4. *To economize* for to save. Calque pattern. AmE economize survives but sounds dated and slightly bureaucratic. Save (money) is the unmarked verb; save up for = save toward a goal; stash away = informal saving. I’m economizing on groceries sounds odd; I’m cutting back on groceries / I’m trying to save on groceries is native.
5. *To put money on deposit* for to save in a CD. Russian положить на депозит. AmE: deposit in a checking/savings account = put in the account (no English idiom on deposit in this sense). For a fixed-term: a CD (certificate of deposit); I put money in a CD or I bought a CD. I put my money on deposit is BrE/dated.
6. *Profit* for any investment return. Russian прибыль maps to profit. AmE: profit = revenue minus cost (business term); for investment returns, AmE uses return, gain, yield, income. I made a profit on my stocks is OK colloquially but more native is I had a gain on my stocks or the stock returned 15%.
7. *Tax* singular vs *taxes* plural. AmE convention: taxes plural is unmarked (I do my taxes in March, I owe taxes). Tax singular appears in compounds (tax return, tax credit, tax law). Russian speakers sometimes say I pay tax — fine in BrE, slightly off in AmE; native is I pay taxes.

Summary

• The tax-flow chain: gross income → AGI → taxable income → tax liability → credits → refund/owe.
• Rates: marginal vs effective; the bracket ladder.
• Capital gains: STCG (ordinary rates), LTCG (0/15/20%), qualified dividends (LTCG rates), NIIT (3.8% surtax), step-up at death.
• AMT: parallel system; mostly bites high earners and ISO exercisers.
• Retirement-account architecture: 401(k), 403(b), 457(b), Traditional IRA, Roth IRA, SEP, SIMPLE, HSA, 529.
• Conversions: backdoor Roth, mega-backdoor Roth, Roth conversion ladder, the pro-rata rule.
• Portfolio: three-fund portfolio, asset allocation, rebalancing, expense ratio in bps, index funds vs active.
• Withdrawal: the 4% rule, the 25x rule, sequence-of-returns risk, the bucket strategy, the bond tent.
• Advanced tax: tax-loss harvesting, asset location, DAF, \§1031, \§121 exclusion.
• FIRE: lean / fat / coast / barista FIRE, the FIRE number, savings rate, Roth conversion ladder.

Next theme: Leadership and management — C2 — VUCA and BANI frameworks, antifragility, the OODA loop, dynamic equilibrium, command intent, and the strategic-leadership register of 2026.