My Financial Tips

A stock broker is a qualified and certified professional who undertakes the responsibility of trading securities on behalf of the investors. The concept of trading stocks and other securities with the help of stock brokers has been in practice since decades. This is because many investors interested in stock market trading don’t have the required experience, knowledge and time needed for self-trading.

This concept is gradually changing with time. Internet has revolutionized the entire concept of stock trading by introducing online trading system. Online trading is an internet-based trading facility that allows investors to buy and sell shares through an online stock broker. Online stock brokers operate in a way that is much similar to traditional brokers. They assess the financial situation of the investor, derive an appropriate investment plan and invest the money according to that plan. Apart from these, there are also certain other benefits of using online brokerage houses for security trading. Online brokerage websites are convenient, efficient and secured. It is now possible for investors to access their financial information by just clicking the mouse. They no longer are required to submit written requests or stand in long queues in order to get their desired information. Apart from these, online stock brokerage sites offer wealth of information to investors, thereby imparting useful knowledge about stock trading and managing investments, so that investors can make informed decisions regarding their trades. In-depth information about each company’s history and financial status is available for investors so that they can perform a thorough research prior to investing. Through these websites, one can easily access the past and present performance of each individual stock. Also available are tools using which one can even predict the future performance of a stock up to almost 90% accuracy.

However, none of these services are free. Investors turning towards online trading need to pay certain fees for all the services provided by online stock brokers. Prominent among these include account opening costs, maintenance costs and brokerage costs. Account opening costs are the charges that investors must pay in order to open an account with the online broker. Usually, this is a one-time payment. Maintenance costs are the charges that are levied by the online stock broker in order to maintain the account. Brokerage fee is the charge levied every time an investor buys or sells shares. This fee is collected either as a fixed amount or in the form of a certain percentage of the transaction. Apart from these, there is one more fee that investors must pay. This is the depository fee. During earlier days, shares were held in the form of certificates. Now, they are stored in the form of electronic documents in a dematerialized account, also referred to as ‘demat’ account. Online brokerage firms charge depository fee in order to maintain these accounts.

All these costs differ according to the broker. In any case, all these charges are significantly lower than the costs an investor has to pay for similar services from a traditional stock broker. Added to these are other benefits associated with online brokers that make the investment worth its value.

401 (k) plans are the most popular and unique retirement-cum-investment plans around the world. Classified under the category of defined contribution plans, 401 (k) plans are primarily initiated by employers with the objective of safeguarding the financial uncertainty of an employee at the time of retirement.

In case of a 401(k) plan, the employee is required to contribute a certain percentage of his monthly salary towards payment of premium. According to IRS, one can contribute up to $15,000 per year towards the plan. In certain companies, even the employer makes an equal contribution towards an employee’s 401(k) plan. This money is then invested in mutual funds, stocks, money market accounts and bonds. These investments are made as per the specifications given by the employee.

It is the responsibility of employers to secure the future of their employees after retirement. In this regard, 401 (k) plans are extremely beneficial. Some of the benefits that these plans offer to employers include:

1.    Good strategy to attract potential employees from other companies by providing better incentives and benefits as a part of 401(k) plans
2.    Ensuring better growth and increased revenues by enticing employees with higher contribution towards 401 (k) plans depending on their performance
3.    Also, 401 (k) plans are the most economical means of retaining employees.
4.    Any contributions made towards 401(k) plans can be categorized by employers under tax-deductible expenses

In case of employees, benefits of 401(k) plans include getting free money from the employer, better financial security at the time of retirement and lower taxable income. This is because contributions made towards the plan are deducted from an employee’s salary even before federal tax is calculated. One can accumulate savings without thinking about deposits. 401(k) plans even provide employee with the opportunity to defer their tax payments on earnings made on 401(k) investments until retirement. In this way, people can save hundreds of dollars as several states don’t collect income tax for retirees. Even if a state collects, retirees are placed in a lower tax bracket.

In any case, it is important to have a proper planning in order to gain maximum benefits from a 401 (K) plan. Before investing, one should know about different types of 401(k) plans including their advantages and disadvantages. Below mentioned are some of these plans.

1.    Traditional 401(k) Plans: In these plans, taxable income of the employer is calculated after deducting the contributions made towards 401 (k) plans. In this way, one can save more and pay less tax. Disadvantage of these plans is that the withdrawals are taxable as per the existing income-tax norms of the state. These plans work better for employees working in states where income tax rates are low for retired people. However, these plans are not good for retirees preferring part-time jobs after retirements. Since earnings are taxable, such people have the risk of getting into higher tax bracket when the regular income from employment is combined with the income from a 401 (k) plan.

2.    Roth 401 (k) Plans: In these plans, the entire monthly earnings of the employer are calculated as taxable income. Contributions to the plan are made on an after-tax basis. These plans are beneficial because there is no tax on contributions nor the employee is required to pay any tax on earnings. Another advantage of these plans is that any amount that has been withdrawn due to emergency purposes is non-taxable. Also, these plans are highly beneficial for people planning to work after retirement.  However, it is important for a person to hold an account for at least five years.

Two basic parameters one must always consider while selecting a 401(k) plan include the income tax rate after retirement and the net returns on investment.