The advance/decline line (or A/D line) is a technical indicator that plots the difference between the number of advancing and declining stocks on a daily basis. The indicator is cumulative, with a positive number being added to the prior number, or if the number is negative it is subtracted from the prior number.
The A/D line is used to show market sentiment, as it tells traders whether there are more stocks rising or falling. It is used to confirm price trends in major indexes, and can also warn of reversals when divergence occurs.
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Key Takeaways
The advance/decline (A/D) line is a breadth indicator used to show how many stocks are participating in a stock market rally or decline.
When major indexes are rallying, a rising A/D line confirms the uptrend showing strong participation.
If major indexes are rallying and the A/D line is falling, it shows that fewer stocks are participating in the rally which means the index could be nearing the end of its rally.
When major indexes are declining, a falling advance/decline line confirms the downtrend.
If major indexes are declining and the A/D line is rising, fewer stocks are declining over time, which means the index may be near the end of its decline.
The Formula for Advance/Decline (A/D) Line Is:
A/D=Net Advances+{PA, if PA value exists0, if no PA valuewhere:Net Advances=Difference between number of dailyascending and declining stocksPA=Previous AdvancesPrevious Advances=Prior indicator reading
How to Calculate the A/D Line
Subtract the number of stocks that finished lower on the day from the number of stocks that finished higher on the day. This will give you the Net Advances.
If this is the first time calculating the average, the Net Advances will be the first value used for the indicator.
On the next day, calculate the Net Advances for that day. Add to the total from the prior day if positive or subtract if negative.
Repeat steps one and three daily.
What Does the A/D Line Tell You?
The A/D line is used to confirm the strength of a current trend and its likelihood of reversing. The indicator shows if the majority of stocks are participating in the direction of the market.
If the indexes are moving up but the A/D line is sloping downwards, called bearish divergence, it’s a sign that the markets are losing their breadth and may be about to reverse direction. If the slope of the A/D line is up and the market is trending upward, then the market is said to be healthy.
Conversely, if the indexes are continuing to move lower and the A/D line has turned upwards, called bullish divergence, it may be an indication that the sellers are losing their conviction. If the A/D line and the markets are both trending lower together, there is a greater chance that declining prices will continue.
Difference Between the A/D Line and Arms Index (TRIN)
The A/D line is typically used as a longer-term indicator, showing how many stocks are rising and falling over time. The Arms Index (TRIN), on the other hand, is typically a shorter-term indicator that measures the ratio of advancing stocks to the ratio of advancing volume. Because the calculations and the time frame they focus on are different, both these indicators tell traders different pieces of information.
Limitations of Using the A/D Line
The A/D line won’t always provide accurate readings in regards to NASDAQ stocks. This is because the NASDAQ frequently lists small speculative companies, many of which eventually fail or get delisted. While the stocks get delisted on the exchange, they remain in the prior calculated values of the A/D line. This then affects future calculations which are added to the cumulative prior value. Because of this, the A/D line will sometimes fall for extended periods of time, even while NASDAQ-related indexes are rising.
Another thing to be aware of is that some indexes are market capitalization weighted. This means that the bigger the company the more impact they have on the index’s movement. The A/D line gives equal weight to all stocks. Therefore, it is a better gauge of the average small to mid-cap stock, and not the fewer in number large or mega-cap stocks.
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A 401(k) plan is a retirement savings plan offered by many American employers that has tax advantages for the saver. It is named after a section of the U.S. Internal Revenue Code (IRC).
The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of that contribution. The employee gets to choose among a number of investment options, usually mutual funds.
Key Takeaways
A 401(k) plan is a company-sponsored retirement account to which employees can contribute income, while employers may match contributions.
There are two basic types of 401(k)s—traditional and Roth—which differ primarily in how they’re taxed.
With a traditional 401(k), employee contributions are pre-tax, meaning they reduce taxable income, but withdrawals are taxed.
Employee contributions to Roth 401(k)s are made with after-tax income: There’s no tax deduction in the contribution year, but withdrawals are tax-free.
Employer contributions can be made to both traditional and Roth 401(k) plans.
Introduction To The 401(K)
How 401(k) Plans Work
The 401(k) plan was designed by the United States Congress to encourage Americans to save for retirement. Among the benefits they offer is tax savings.
There are two main options, each with distinct tax advantages.
Traditional 401(k)
With a traditional 401(k), employee contributions are deducted from gross income. This means the money comes from your paycheck before income taxes have been deducted. As a result, your taxable income is reduced by the total amount of contributions for the year and can be reported as a tax deduction for that tax year. No taxes are due on either the money contributed or the investment earnings until you withdraw the money, usually in retirement.
Roth 401(k)
With a Roth 401(k), contributions are deducted from your after-tax income. This means contributions come from your pay after income taxes have been deducted. As a result, there is no tax deduction in the year of the contribution. When you withdraw the money during retirement, though, you don’t have to pay any additional taxes on your contribution or on the investment earnings.
However, not all employers offer the option of a Roth account. If the Roth is offered, you can choose between a traditional and Roth 401(k). Or you can contribute to both up to the annual contribution limit.
Contributing to a 401(k) Plan
A 401(k) is a defined contribution plan. The employee and employer can make contributions to the account up to the dollar limits set by the Internal Revenue Service (IRS).
A defined contribution plan is an alternative to the traditional pension, known as a defined-benefit plan. With a pension, the employer is committed to providing a specific amount of money to the employee for life during retirement.
In recent decades, 401(k) plans have become more common, and traditional pensions have become rare as employers have shifted the responsibility and risk of saving for retirement to their employees.
Employees also are responsible for choosing the specific investments within their 401(k) accounts from a selection that their employer offers. Those offerings typically include an assortment of stock and bond mutual funds and target-date funds designed to reduce the risk of investment losses as the employee approaches retirement.
They may also include guaranteed investment contracts (GICs) issued by insurance companies and sometimes the employer’s own stock.
Contribution Limits
The maximum amount that an employee or employer can contribute to a 401(k) plan is adjusted periodically to account for inflation, which is a metric that measures rising prices in an economy.
For 2022, the annual limit on employee contributions was $20,500 per year for workers under age 50. However, those aged 50 and over could make a $6,500 catch-up contribution.
For 2023, the annual limit on employee contributions is $22,500 per year for workers under age 50. If you are age 50 or over, you can make an additional $7,500 catch-up contribution.
If your employer also contributes or if you elect to make additional, non-deductible after-tax contributions to your traditional 401(k) account, there is a total employee-and-employer contribution amount for the year:
2022
For workers under 50 years old, the total employee-employer contributions could not exceed $61,000 per year.
If the catch-up contribution for those 50 and over was included, the limit was $67,500.
2023
For workers under 50 years old, the total employee-employer contributions cannot exceed $66,000 per year.
If the catch-up contribution for those 50 and over is included, the limit is $73,500.
Employer Matching
Employers who match employee contributions use various formulas to calculate that match.
For instance, an employer might match 50 cents for every dollar that the employee contributes, up to a certain percentage of salary.
Financial advisors often recommend that employees contribute at least enough money to their 401(k) plans to get the full employer match.
Contributing to Both a Traditional and a Roth 401(k)
If their employer offers both types of 401(k) plans, an employee can split their contributions, putting some money into a traditional 401(k) and some into a Roth 401(k).
However, their total contribution to the two types of accounts can’t exceed the limit for one account (such as $20,500 for those under age 50 in 2022 or $22,500 in 2023).
Employer contributions can be made to a traditional 401(k) account and a Roth 401(k). Withdrawals from the former will be subject to tax, whereas qualifying withdrawals from the latter are tax-free.
How Does a 401(k) Earn Money?
Your contributions to your 401(k) account are invested according to the choices you make from the selection your employer offers. As noted above, these options typically include an assortment of stock and bond mutual funds and target-date funds designed to reduce the risk of investment losses as you get closer to retirement.
How much you contribute each year, whether or not your company matches your contributions, your investments and their returns, plus the number of years you have until retirement all contribute to how quickly and how much your money will grow.
Provided you don’t remove funds from your account, you don’t have to pay taxes on investment gains, interest, or dividends until you withdraw money from the account after retirement (unless you have a Roth 401(k), in which case you don’t have to pay taxes on qualified withdrawals when you retire).
What’s more, if you open a 401(k) when you are young, it has the potential to earn more money for you, thanks to the power of compounding. The benefit of compounding is that returns generated by savings can be reinvested back into the account and begin generating returns of their own.
Over a period of many years, the compounded earnings on your 401(k) account can actually be larger than the contributions you have made to the account. In this way, as you keep contributing to your 401(k), it has the potential to grow into a sizable chunk of money over time.
Taking Withdrawals From a 401(k)
Once money goes into a 401(k), it is difficult to withdraw it without paying taxes on the withdrawal amounts.
“Make sure that you still save enough on the outside for emergencies and expenses you may have before retirement,” says Dan Stewart, CFA®, president of Revere Asset Management Inc., in Dallas. “Do not put all of your savings into your 401(k) where you cannot easily access it, if necessary.”
The earnings in a 401(k) account are tax deferred in the case of traditional 401(k)s and tax free in the case of Roths. When the traditional 401(k) owner makes withdrawals, that money (which has never been taxed) will be taxed as ordinary income. Roth account owners have already paid income tax on the money they contributed to the plan and will owe no tax on their withdrawals as long as they satisfy certain requirements.
Both traditional and Roth 401(k) owners must be at least age 59½—or meet other criteria spelled out by the IRS, such as being totally and permanently disabled—when they start to make withdrawals to avoid a penalty.
This penalty is usually an additional 10% early distribution tax on top of any other tax they owe.
Some employers allow employees to take out a loan against their contributions to a 401(k) plan. The employee is essentially borrowing from themselves. If you take out a 401(k) loan and leave the job before the loan is repaid, you’ll have to repay it in a lump sum or face the 10% penalty for an early withdrawal.
Required Minimum Distributions (RMDs)
Traditional 401(k) account holders are subject to required minimum distributions (RMDs) after reaching a certain age. (Withdrawals are often referred to as distributions in IRS parlance.)
Beginning on January 1, 2023, account owners who have retired must start taking RMDs from their 401(k) plans starting at age 73. This size of the RMD is calculated is based on your life expectancy at the time. Prior to 2020, the RMD age was 70½ years old. Before 2023, the RMD age was 72. It was updated to age 73 in the omnibus spending bill H.R. 2617 in 2022.
Note that distributions from a traditional 401(k) are taxable. Qualified withdrawals from a Roth 401(k) are not.
Roth IRAs, unlike Roth 401(k)s, are not subject to RMDs during the owner’s lifetime.
Traditional 401(k) vs. Roth 401(k)
When 401(k) plans became available in 1978, companies and their employees had just one choice: the traditional 401(k). Then in 2006, Roth 401(k)s arrived. Roths are named for former U.S. Senator William Roth of Delaware, the primary sponsor of the 1997 legislation that made the Roth IRA possible.
While Roth 401(k)s were a little slow to catch on, many employers now offer them. So the first decision employees often have to make is choosing between a Roth and a traditional (401(k).
As a general rule, employees who expect to be in a lower marginal tax bracket after they retire might want to opt for a traditional 401(k) and take advantage of the immediate tax break.
On the other hand, employees who expect to be in a higher bracket after retiring might opt for the Roth so that they can avoid taxes on their savings later. Also important—especially if the Roth has years to grow—is that, since there is no tax on withdrawals, all the money that the contributions earn over decades of being in the account is tax free.
As a practical matter, the Roth reduces your immediate spending power more than a traditional 401(k) plan. That matters if your budget is tight.
Since no one can predict what tax rates will be decades from now, neither type of 401(k) is a sure thing. For that reason, many financial advisors suggest that people hedge their bets, putting some of their money into each.
When You Leave Your Job
When you leave a company where you’ve been employed and you have a 401(k) plan, you generally have four options:
1. Withdraw the Money
Withdrawing the money is usually a bad idea unless you urgently need the cash. The money will be taxable in the year it’s withdrawn. You will be hit with the additional 10% early distribution tax unless you are over 59½, permanently disabled, or meet the other IRS criteria for an exception to the rule.
In the case of a Roth 401(k), you can withdraw your contributions (but not any profits) tax free and without penalty at any time as long as you have had the account for at least five years. Remember, however, that you’re still diminishing your retirement savings, which you may regret later.
2. Roll Your 401(k) into an IRA
By moving the money into an IRA at a brokerage firm, a mutual fund company, or a bank, you can avoid immediate taxes and maintain the account’s tax-advantaged status. What’s more, you will be able to select from among a wider range of investment choices than with your employer’s plan.
The IRS has relatively strict rules on rollovers and how they need to be accomplished, and running afoul of them is costly. Typically, the financial institution that is in line to receive the money will be more than happy to help with the process and prevent any missteps.
Funds withdrawn from your 401(k) must be rolled over to another retirement account within 60 days to avoid taxes and penalties.
3. Leave Your 401(k) With the Old Employer
In many cases, employers will permit a departing employee to keep a 401(k) account in their old plan indefinitely, though the employee can’t make any further contributions to it. This generally applies to accounts worth at least $5,000. In the case of smaller accounts, the employer may give the employee no choice but to move the money elsewhere.
Leaving 401(k) money where it is can make sense if the old employer’s plan is well managed and you are satisfied with the investment choices it offers. The danger is that employees who change jobs over the course of their careers can leave a trail of old 401(k) plans and may forget about one or more of them. Their heirs might also be unaware of the existence of the accounts.
4. Move Your 401(k) to a New Employer
You can usually move your 401(k) balance to your new employer’s plan. As with an IRA rollover, this maintains the account’s tax-deferred status and avoids immediate taxes.
It could be a wise move if you aren’t comfortable with making the investment decisions involved in managing a rollover IRA and would rather leave some of that work to the new plan’s administrator.
How Do You Start a 401(k)?
The simplest way to start a 401(k) plan is through your employer. Many companies offer 401(k) plans and some will match part of an employee’s contributions. In this case, your 401(k) paperwork and payments will be handled by the company during onboarding.
If you are self-employed or run a small business with your spouse, you may be eligible for a solo 401(k) plan, also known as an independent 401(k). These retirement plans allow freelancers and independent contractors to fund their own retirement, even though they are not employed by another company. A solo 401(k) can be created through most online brokers.
What Is the Maximum Contribution to a 401(k)?
For most people, the maximum contribution to a 401(k) plan is $20,500 in 2022 and $22,500 in 2023. If you are more than 50 years old, you can make an additional 2022 catch-up contribution of $6,500 for a total of $27,000 (the catch-up contribution for 2023 is $7,500 for a total of $30,000). There are also limitations on the employer’s matching contribution: The combined employer-employee contributions cannot exceed $61,000 in 2022 (or $67,500 for employees over 50 years old) and $66,000 in 2023 (or $73,500 for employees over 50 years old).
Is It a Good Idea to Take Early Withdrawals from Your 401(k)?
There are few advantages to taking an early withdrawal from a 401(k) plan. If you take withdrawals before age 59½, you will face a 10% penalty in addition to any taxes you owe. However, some employers allow hardship withdrawals for sudden financial needs, such as medical costs, funeral costs, or buying a home. This can help you avoid the early withdrawal penalty but you will still have to pay taxes on the withdrawal.
What Is the Main Benefit of a 401(k)?
A 401(k) plan lets you reduce your tax burden while saving for retirement. Not only do you get tax-deferred gains but it’s also hassle-free since contributions are automatically subtracted from your paycheck. In addition, many employers will match part of their employee’s 401(k) contributions, effectively giving them a free boost to their retirement savings.
The Bottom Line
A 401(k) plan is a workplace retirement plan that lets you make annual contributions up to a certain limit and invest that money for the benefit of your later years once your working days are done.
401(k) plans come in two types: a traditional or Roth. The traditional 401(k) involves pre-tax contributions that give you a tax break when you make them and reduce your taxable income. However, you pay ordinary income tax on your withdrawals. The Roth 401(k) involves after-tax contributions and no upfront tax break, but you’ll pay no taxes on your withdrawals in retirement. Both accounts allow employer contributions that can increase your savings.
An agency cost is a type of internal company expense, which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions, and disruptions, such as conflicts of interest between shareholders and management. The payment of the agency cost is to the acting agent.
Key Takeaways
An agency cost is an internal expense that comes from an agent taking action on behalf of a principal.
Core inefficiencies, dissatisfactions, and disruptions contribute to agency costs.
Agency costs that include fees associated with managing the needs of conflicting parties are called agency risk.
An agent-principal relationship exists between a company’s management (agent) and its shareholders (principal).
Understanding Agency Cost
Agency costs can occur when the interests of the executive management of a corporation conflict with its shareholders. Shareholders may want management to run the company in a certain manner, which increases shareholder value.
Conversely, the management may look to grow the company in other ways, which may conceivably run counter to the shareholders’ best interests. As a result, the shareholders would experience agency costs.
As early as 1932, American economists Gardiner Coit Means and Adolf Augustus Berle discussed corporate governance in terms of an “agent” and a “principal,” in applying these principals towards the development of large corporations, where the interests of the directors and managers differed from those of owners.
Principal-Agent Relationship
The opposing party dynamic is called the principal-agent relationship, which primarily refers to the relationships between shareholders and management personnel. In this scenario, the shareholders are principals, and the management operatives act as agents.
However, the principal-agent relationship may also refer to other pairs of connected parties with similar power characteristics. For example, the relationship between politicians (the agents), and the voters (the principals) can result in agency costs. If the politicians promise to take certain legislative actions while running for election and once elected, don’t fulfill those promises, the voters experience agency costs. In an extension of the principal-agent dynamic known as the “multiple principal problems” describes a scenario where a person acts on behalf of a group of other individuals.
A Closer Look at Agency Costs
Agency costs include any fees associated with managing the needs of conflicting parties, in the process of evaluating and resolving disputes. This cost is also known as agency risk. Agency costs are necessary expenses within any organization where the principals do not yield complete autonomous power.
Due to their failure to operate in a way that benefits the agents working underneath them, it can ultimately negatively impact their profitability. These costs also refer to economic incentives such as performance bonuses, stock options, and other carrots, which would stimulate agents to execute their duties properly. The agent’s purpose is to help a company thrive, thereby aligning the interests of all stakeholders.
Dissatisfied Shareholders
Shareholders who disagree with the direction management takes, may be less inclined to hold on to the company’s stock over the long term. Also, if a specific action triggers enough shareholders to sell their shares, a mass sell-off could happen, resulting in a decline in the stock price. As a result, companies have a financial interest in benefitting shareholders and improving the company’s financial position, as failing to do so could result in stock prices dropping.
Additionally, a significant purge of shares could potentially spook potential new investors from taking positions, thus causing a chain reaction, which could depress stock prices even further.
In cases where the shareholders become particularly distressed with the actions of a company’s top brass, an attempt to elect different members to the board of directors may occur. The ouster of the existing management can happen if shareholders vote to appoint new members to the board. Not only can this jarring action result in significant financial costs, but it can also result in the expenditure of time and mental resources.
Such upheavals also cause unpleasant and exorbitant red-tape problems, inherent in top-chain recalibration of power.
Real-World Example of Agency Costs
Some of the most notorious examples of agency risks come during financial scandals, such as the Enron debacle in 2001. As reported in this article on SmallBusiness.chron.com, the company’s board of directors and senior officers sold off their stock shares at higher prices, due to fraudulent accounting information, which artificially inflated the stock’s value. As a result, shareholders lost significant money, when Enron share price consequently nosedived.
Broken down to its simplest terms, according to the Journal of Accountancy, the Enron debacle happened because of “individual and collective greed born in an atmosphere of market euphoria and corporate arrogance.”
An amended return is a form filed in order to make corrections to a tax return from a previous year. An amended return can correct errors and claim a more advantageous tax status, such as a refund. For example, one might choose to file an amended return in instances of misreported earnings or tax credits. Mathematical errors, however, do not require amendments because the IRS automatically corrects for such errors when processing the tax return.
Key Takeaways
An amended return is a form filed in order to make corrections to a tax return from a previous year.
Form 1040-X, available on the IRS website, is the form for filing amended returns.
Changes in filing status, changes in the number of claimed dependents, incorrectly claimed tax credits and deductions, and incorrectly reported income are reasons individual taxpayers file an amended return.
There is a three-year statute of limitations on issuing tax refund checks.
Who Should File an Amended Return?
All taxpayers are required to file their taxes annually for the previous tax year. Taxpayers may realize that they made a mistake in filling out their tax forms, or their circumstances may have changed after they have submitted or mailed a return that has been accepted by the government. If this occurs, the Internal Revenue Service (IRS) has provided a way for these individuals to redo their taxes by providing an amended return form, Form 1040-X, on the IRS website.
An amended tax return can be filed even after the tax filing deadline for the tax year has passed.
Not all errors need amending by the form. The IRS will spot and correct a mathematical error, for example, when the initial tax return is sent in for processing. When this happens, any refund owed will be adjusted and any extra tax liability due will be billed to the taxpayer. In the event that the individual fails to include a required form or schedule in their submitted original tax return, the IRS will send a letter requesting that they mail the missing information to one of their offices.
When to File an Amended Return
A taxpayer must file an amended return if:
The taxpayer’s filing status for the tax year changed or was incorrectly entered. For example, if an individual filed as single but actually got married on the last day of the tax year, they will need to amend their return by filing their taxes under the appropriate status—married filing jointly (MFJ) or married filing separately (MFS).
The number of dependents claimed is inaccurate. An amended return will be necessary if a taxpayer needs to claim additional dependents or remove dependents that were previously claimed. For example, a couple may have included a baby born in January before taxes were filed in April on the prior year’s tax return. That baby cannot be included on the previous year’s tax return because they were not born before the end of the year.
Tax credits and deductions were claimed incorrectly or were not claimed. In the latter case, the taxpayer may have realized that they qualified for a credit or deduction and may want to file an amended return to reflect this.
The income reported for the tax year was incorrect. If a taxpayer receives additional tax documents for the tax year (say a Form 1099 or a K-1 arrives in the mail after the tax deadline), they may file an amended tax return to report the additional income.
Deductibility of certain expenses change as a result of legislation changes. Sometimes, legislation will come through after a taxpayer has filed a return that affects the deductibility of certain expenses. For example, the deduction for private mortgage insurance (PMI) originally expired on Dec. 31, 2017, due to the Tax Cuts and Jobs Act of 2017. The Consolidated Appropriations Act, signed into law in December 2019, extended the deduction through Dec. 31, 2020. This made the deduction available for the 2019 and 2020 tax years and retroactive for the 2018 tax year.
Tax relief due to a natural disaster changes the taxpayer’s tax liability. This is a common issue for taxpayers who have been affected by a natural disaster, especially one in the later part of the tax year. The government frequently offers tax relief for those affected by natural disasters, but legislation may take longer to finalize than the typical tax season window allows. Taxpayers should pay their full tax liability as it sits when the tax return is due. If legislation changes, an amended return can be filed to reclaim any refund owed to them due to natural disaster tax relief.
The taxpayer realizes that they owe more taxes than they actually paid. To avoid getting hit with a penalty from the government, they can file an amended return with the IRS.
How to Amend a Tax Return
Form 1040-X has three columns: A, B, and C. Under column A, the figure that was reported in the original or last-amended tax form is recorded. The taxpayer will need to input the adjusted or correct number in column C. The difference between columns A and C is reflected in column B. The adjustments made to a tax return will either result in a tax refund, balance due, or no tax change. The taxpayer also has to explain what changes they are making and the reasons for making each change in a section provided on the back of Form 1040-X.
Disadvantages of an Amended Tax Return
The drawback of filing an amended tax return is that Form 1040-X cannot be submitted electronically for every tax year, although the IRS has recently started accepting e-filed amended returns for tax year 2019. If filling out the form manually, the taxpayer has to mail the printed-out document to the IRS Service Center that processed the original tax form. The IRS manually processes amended returns, and the process can take 16 weeks—or even longer, if the amended return is not signed, is incomplete, has errors, requires additional information, needs clearance by the IRS bankruptcy department, has been routed to another specialized area, or has been affected by identity fraud.
There is, however, a three-year statute of limitations for issuing tax refund checks. Therefore, the taxpayer must file any amended returns that will result in a tax refund within three years after the date they filed the original tax return. An amended return filed to account for additional income or overstated deductions does not fall under any such statute and can be filed at any time.
Pros
You can correct errors on an amended tax return.
You can claim a refund you were owed even if you didn’t file for it.
You can correct for circumstances that changed since you originally filed.
Cons
Form 1040-X cannot be filed electronically for all tax years.
Processing an amended return can take 16 weeks or longer.
There is a three-year statute of limitations for collecting tax refunds.
