How to Invest in Stocks

Learning How to Invest in Stocks 101

Regardless of how many Wall Street films you have seen in the past, stocks and shares is not an easy topic. Those who are searching online for resources on how to invest in stocks for beginners or with little money thinking that they will “certainly” become the next overnight millionaires should, first and foremost, receive a word of warning: Yes, some people can really get rich overnight playing with shares at the stock exchange market; however, but that happens once a blue moon. Every person willing to dip a toe in the world of stocks investment should, at the very least, get prepared first and —as if you were playing chess— think his moves twice beforehand to prevent regrets after.

That being said… How to invest in stocks?

First Things First: Get Informed

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Before spending one penny in a stock market, the first thing you should do is to get informed. Let’s ask a few questions so you can ask yourself if you know the answers:

  • Do you know what a stock is, and how they are currently stored?
  • How many kinds of shares are there, and which of them you can buy?
  • Do you know what a stock broker is? Have you found any for yourself already?
  • Lastly, have you spoken with your accountant about the financial and tax consequences (if any) of becoming a stock investor?

If you do not know the answer to any of these questions, then please let me suggest you the following readings:

  • Investing articles on stocks and the stock market could be a reasonable starting point.
  • The Beginners’ Guide to Investing, by the American Securities and Exchange Commission can provide you a more specific introduction to the topic.
  • Investor’s glossary page can help you clear your doubts.
  • Lists of stock brokers such as this one by Nasdaq can help you find a reputable stock trader for your assets.

Learning How to Invest in Stocks

Next, choose how you will invest in stocks

Once you have covered the basics and feel better informed to start investing, you need to find out a way to do it suitable for yourself and for your money.  There are many options and approaches for this, yet, for beginners, I like to keep things simple. Remember the goal is to make money, and that you have basically two ways to get it with stocks:

  • You either buy stocks to resell them after a short time.
  • You buy stocks to expect a profit sharing payment or resell them after a longer term.

In both cases, your goal will be to make more money from what you invested, a profit.

What are the best stocks to invest in?

The best stocks are on companies or markets you understand, so this answer will depend strongly in your background. Let’s try to make it clear with an example, anyway:

Let’s say someone offers us stocks from an ice-cream company… would you buy them? An uninformed person may go buy them just because “heard” those shares are “about to go up”, and that “it is the exact moment to buy them.” Someone who understands the ice-cream market, however, would pause for a moment and think: Ice-creams are mainly sold in summer. During the winter, their demand falls down. The wisest move would be to buy the stocks in winter, when demand is low and prices go down; and to sell them in spring or at the beginning of summer, when demand goes up and so do prices.

After learning how to invest in stocks, remember knowing the market you are about to invest in will help you get a better understanding of when to buy or sell your stocks.

Certainly, your stock broker should advise you about your investments too.

Safe Harbor 401k Plan

Safe Harbor 401k Plan

A safe harbor 401k plan is a unique type of retirement plan with two significant differences from a traditional 401k plan.  One, it requires mandatory employer contributions to employee accounts.  Second, it gives an employer an ability to offer a 401k plan to employees without any required discrimination testing.

The Safe Harbor 401k plan permits eligible employees to defer a portion of their salary to their own retirement plan account.  Employers then contribute to the participant’s account on behalf of eligible employees.  And, these employer contributions come in the form of either matching or non-elective amounts.

Safe Harbor 401k Plan Eligibility

Most any type of small business is eligible to establish and maintain a safe harbor 401k plan.  Sole proprietorships, LLC’s, partnerships, and corporations, including S corporations, are examples.

All eligible employees must be allowed to participate in the 401(k). An eligible employee is any one who:

  • is a minimum of 21 years old,
  • has performed one year of service and worked 1,000 hours in the year beginning with the date of hire.
  • Union employees and non-resident aliens without United States income may be excluded from participation in the plan.

One important thing to remember is that an employer may not establish more restrictive requirements than those listed above.  However, employers may set up less restrictive requirements for employee entrance into the safe harbor 401k plan.

Safe Harbor 401k Tax Benefits Tax Advantages

Employer contributions are tax deductible for the employer — up to 25% of compensation of all eligible participants.  Employee elective deferrals are excluded from the employee’s income for Federal Income Tax purposes.  Tax-deferred growth potential is possible — any investment earnings grow tax-deferred until withdrawn.

Vesting

Vesting refers to the participant’s ownership rights in the value of his or her retirement account.  Often, a traditional 401k plan required participants to wait a certain number of years before they can access the employer matching contributions. 

However, a safe harbor 401k is unique in comparison to other types of 401k plans in that all employee and employer safe harbor contributions are fully vested immediately.  There is no waiting period for employees to access the matching contributions made by employers.

Plan Deadline

Generally, the deadline to establish a new plan is anytime between January 1 and October 1 of the applicable year.

Contribution Flexibility

Under a safe-harbor plan, an employer can match each eligible employee’s contribution, dollar for dollar, up to 3% of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3 percent, but not over 5%, of the employee’s compensation.

Alternatively, employers may make a non-elective contribution equal to 3 percent of compensation to each eligible employee’s account. Non-elective contributions essentially means that contributions are made by employers to employee accounts regardless of employee contributions. 

Plan Compliance Issues

Because of the vested matching contributions required of the employer, the safe harbor 401k does not call for broad discrimination testing.  The safe harbor employer contributions stand in the place of discrimination testing.

Employee Benefits

  • Attracting and retaining key employees is easier with a 401k plan.
  • A 401k plan can help in providing retirement income for eligible employees.
  • Elected Roth contributions are allowed in safe harbor 401k plans.

Early Withdrawal Penalty

A 10% penalty is typically applied to all early distributions on safe harbor 401k plans, as well as traditional 401k plans.  Early distributions are distributions that occur before the age of 59½.

HSA Rules

HSA Rules For Employer Contributions

Health Savings Account Issues for Employers and Employees

HSA Rules For Employer Contributions Must Be Fair for Employees! 

First, and perhaps most importantly, employer need to know that HSA rules require that contributions to employees must be “comparable” for all employees participating in the HSA.  If they are not comparable, or fair in terms of the IRS code, there will be an excise tax equal to 35% of the amount that the employer contributed to employees’ HSA’s.  Comparable contributions are contributions to all HSA’s of an employer, which are:

1.    The same amount, or
2.    Which are the same percentages of the annual deductible.

When it comes to testing for comparability, an employer may only count employees who are “eligible individuals” covered by the employer under the high-deductible health plan and who have the “same category of coverage” (i.e., self-only or family).  No other classifications of employees are currently permitted.

Part-time employees can, and should, be tested separately from full-time employees.  “Part-time” means customarily employed fewer than 30 hours per week.   

Employer matching contributions to the HSA through a cafeteria plan are not subject to the comparability HSA rules, but cafeteria plan non-discrimination rules apply. Non-discrimination rules typically look to make sure that contributions aren’t greater for higher paid employees than they are for lower paid employees.  (However, contributions that favor lower paid employees are generally considered allowable.)  

Employer contributions into employee’s HSA accounts are always excluded from employees’ income (pre-tax), and distributions are tax-free if taken for “qualified medical expenses”, which now includes over-the-counter drugs.

Timing Issues Regarding the Setup of HSA’s 

HSA rules for qualified medical expenses must be incurred on or after the account was established. If the high-deductible health plan coverage becomes effective on first day of the month, the HSA can be established as early as first day of same month.  Conversely, if the high-deductible health insurance coverage is effective any day other than first day of month, HSA cannot be established until first day of following month.  

Can Medically-Related HSA Distributions be Taken for Someone Other than the Owner? 

Tax-free distributions can be taken for qualified medical expenses of the:

  •  Person covered by the high deductible.
  • Spouse of the individual (even if not covered by the high-deductible health plan).
  • Any dependent of the individual (even if not covered by the high-deductible health plan).

How Much Tax Do I Pay if my Distribution is not Used for Qualified Medical Expenses? 

If an account distribution is not used for qualified medical expenses, the amount of the distribution is included in taxable income for 1040 Federal Tax purposes, and an additional 10% tax is applied except when taken after:

  • Individual dies or becomes disabled, or
  • Individual is age 65.

“Qualified medical expenses” do not include other health insurance (including premiums for dental or vision care).  The exception to these HSA rules include:

  • COBRA continuation coverage.
  • Any health plan coverage while receiving unemployment compensation.
  • For individuals enrolled in Medicare: Medicare premiums and out-of-pocket expenses (Part A, Part B, Medicare HMOs, and prescription drug coverage).
  • The employee’s share of premiums for employer-based coverage.
  • Cannot pay Medigap premiums.
  • Qualified long-term care insurance premiums.

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Should the HSA account holder keep receipts?

YES!  Here is why:

  • The account-owner may need to prove to IRS that distributions from an HSA were for medical expenses and not otherwise reimbursed, and
  • He or she may be required by an insurance company to prove that a high-deductible health plan deductible was met.

Not all medical expenses paid out of the HSA have to be charged against the deductible (e.g. dental care, vision care), and health savings account distributions can be used to reimburse prior years’ expenses as long as they were incurred on or after the date the HSA was established.  There is no time limit on when a distribution must occur, but the individual must keep sufficient records to prove that:

  • the expenses were incurred,
  • they were not paid for or reimbursed by another source, or
  • they were taken as an itemized deduction on a previous tax return.

Mistaken HSA distributions can be returned to the HSA. It should be noted that clear and convincing evidence must be shown that the distribution was a mistake of fact.

The original distribution must be repaid by April 15 of the year following the year in which the individual knew or should have known the distribution was a mistake.

What happens to an HSA when the HSA owner dies? 

If the spouse is the beneficiary of the health savings account, the spouse inheriting the HSA is treated as the owner.  To the extent the spouse is not the beneficiary, the account will no longer be treated as an HSA upon the death of the individual. 

The account will then become taxable to the decedent in the decedent’s final tax return if the estate is the beneficiary, otherwise, it will be taxable to the recipient.

The taxable amount will be reduced by any qualified medical expenses incurred by the deceased individual before his or her death and paid by the recipient of the account.  Also, the taxable amount will be reduced by the amount of estate tax paid due to inclusion of the HSA into the deceased individual’s estate.

HSA Rules: Who Owns the HSA?  The Employer?  The Individual? 

Accounts are owned by the individual (not an employer). The individual decides:

  • Whether he or she should contribute,
  • How much to use for medical expenses,
  • Which medical expenses to pay from the account,
  • Whether to pay for medical expenses from the account or save the account for future use,
  • Which company will hold the account,
  • What type of investments to grow account,

The employer cannot restrict:

The health savings account custodian or trustee can put reasonable limits on accessing the money in the account because of:

  • Frequency of distributions, or
  • The size of the distributions.

Who can be an HSA Trustee or Custodian?

  • Banks,
  • Credit unions,
  • Insurance companies,
  • Entities already approved by the IRS to be an IRA or Archer MSA trustee or custodian,
  • Other entities can apply to the IRS to be approved as a non-bank trustee or custodian.

Trustee, investment, or custodian fees can be paid from the assets in the HSA account without being subject to tax or penalty.

There are no “use-it-or-lose-it rules” like Flexible Spending Arrangements (FSAs).  All amounts in the HSA are fully vested.

Unspent balances in accounts remain in the account until spent.  In this, HSA’s encourages account holders to spend their funds more wisely on their medical care without the “use-it-or-lose-it” hurdles.  HSA’s also encourage account holders to shop around for the best value for their health care dollars.

  • Accounts can grow through investment earnings, just like an IRA. Same investment options and investment limitations as with IRAs.
  • Same restrictions on self-dealing as with IRAs.