Categories
investing

Why You Shouldn’t Tap Into Retirement Accounts

Individuals must learn how to manage their finances in a way that takes into consideration short, mid and long term goals.  A short term goal might include building an emergency fund in a savings account to which you have instant access.  Mid term goals might include saving for a car or down payment for a house.  Long terms goals of course involve saving money for your retirement years.

As you might guess with each goal, different savings strategies must be considered.  If you fail to use the right strategy you may end up losing a significant portion of your savings.  This is the case when you invest money in your future via a retirement plan and then tap into those resources for financial needs that arise before you retire.  Since most retirement plans are by design intended for long term investments, the penalties and consequences of taking your money early can be significant.  Here we look at a few of the negative consequences that go hand-in-hand with early distribution of retirement funds.

Why You Should Leave Your Money in Retirement Accounts

  • Early withdrawal penalties.  With any retirement savings plan that limits withdrawals to those who have reached age 59 1/2, it is important to avoid taking money before that age.  If you do, you will be slapped with an early withdrawal penalty of 10%.  If this was the only penalty, one might be willing to take the hit to their finances in order to access their cash early, however it is only the beginning of possible penalties.
  • Pay attention to loan provisions. You might be tempted to access the money in your account due to the ease at which you can do so.  As a general rule, companies do not set restrictions to how you can use your own retirement money as long as you are willing to repay the money as set forth by the plan.  In most cases you can borrow up to half of your contributions (not to exceed $50,000) with five years to repay the money. Since you are basically paying yourself back, this might seem like an viable alternative to a traditional loan, especially considering the attractive interest rates.  The downside of this option is the fact that should you lose your job your loan must be paid back in full immediately.  In this struggling economy where no job is safe, this is a risk best avoided whenever possible. See these articles for more information about 401k loans and TSP loans.
  • Loss of growth opportunity. Regardless of how or why you might tap into your retirement account, one of the biggest negatives is the loss of growth opportunity.  What many people do not think about when borrowing from their 401k is how much that money could be working for them if left alone in the account.  For this reason you should really consider the bigger picture before taking money from your retirement account that could be of better use right where it is.

Most people will agree that while accessing money in a retirement account could certainly help improve their personal finances in the short term, in almost all situations it is better to leave that money in the account and look for alternatives to borrowing from your retirement.  What seems like a great idea today might not be such a good idea in the long run.

Categories
banking

Is It Possible to Have Too Many Bank Accounts?

A good majority of people have several bank accounts which were set up for different reasons and purposes. Typically, consumers have at least one savings account and one checking account if not more. But is it necessary to have more than that when managing your money?

Benefits to Limiting Number of Bank Accounts

While it may seem logical to some people to establish several accounts to handle money for different reasons or to take advantage of higher interest rates, it can be detrimental to keep multiple accounts open. Here are some reasons why:

  • You’ll pay more in fees for maintaining a variety of accounts
  • You increase the risk of becoming the victim of identity theft
  • You have more accounts to monitor on a regular basis
  • You will have more terms and conditions to keep track of and abide by

Analyze Which Accounts Are Unnecessary

Consumers who have bank accounts open with several banks need to take stock of which accounts are in the best interest of their personal financial plans. You should consider consolidating financial accounts that are not used often and have no other benefit to you. Keep only those that remain active or you may face continual fees for inactivity with some banks. Do a comparison search online between several banks to see who is offering the best deal if your current bank is not up to par with your financial needs.

Multiple Accounts is Not Good Accounting

Some will open several accounts as a way to better track and manage money. It can be a wasted effort and incur too many fees to take the place of real accounting measures. While you may want a savings account strictly for savings, one checking account and a good ledger book is all you need to manage your money regardless of where it is coming from or going to.

When Multiple Accounts Make Sense

There are some exceptions for keeping multiple accounts. Some situations may dictate that having several accounts is actually beneficial including:

  • Dependent accounts – when a child has an account held jointly with a parent
  • Special tax incentives – some accounts will offer tax incentives for establishing and maintaining an account for a special purpose such as education, retirement, and health accounts.
  • Savings accounts for CDs – when a saving account is invested in certificates of deposit that have different maturity rates.
  • Small Business accounts – accounts that are opened by a small business owner as a way to separate business from personal finances.

Overall, it is best to limit where you are stashing your regular cash. As banks are constantly working to gain more business, they remain extremely competitive. You can use that to your advantage to get your current bank to up the ante with better incentives or you can find a new financial institution that is more inline with your needs.

Categories
banking

Consolidating Bank and Investment Accounts

There are so many aspects to managing your personal finances that it can sometimes be a challenge keeping everything together.  In order to realize financial security in your life you must be able to juggle several tasks simultaneously.  You will have to know how to make money, save money, invest money and pay bills on a regular basis to ensure all of your financial goals can be reached.  With so many balls in the air at the same time, many people find it beneficial to consolidate their accounts to keep all of their finances in order.  Here we look at how you can consolidate your financial accounts and the benefits that can be realized by doing so.

Benefits of consolidating financial accounts

Consolidating bank accounts

It is not uncommon for individuals to have several accounts at different banks.  This could be due to several factors.  For example, you might use a bank with a convenient location for day-to-day transactions, or you might use an online savings account for lower fees and higher interest rates.  The problem with having your money spread all around is the difficulty in keeping track of your finances.  Managing multiple accounts increases the likelihood of making mistakes or noticing errors that could end up costing you more money in the long run.

By consolidating your bank accounts into one bank you can often save money across the board with reduced fees or other rewards such as favorable terms and interest rates as a result of having multiple accounts with one bank.  When you keep all of your accounts in one place you can receive consolidated statements which make it easier to see all of your finances in one easy place as well as providing convenient documentation that may be needed for tax season.

Consolidating investment accounts

When you have your investments spread out and managed by different brokerage firms or mutual fund companies, it is often difficult to know exactly what is going on with your money.  Consolidating investment accounts with one firm can offer the following benefits.

  • Keep track of investments. When all of your accounts are managed and located at the same place it is more convenient to track your assets. You can see in one place how your investments are performing.
  • Keep track of changes. Fees, commissions and policies are subject to change with each company.  These changes can be hard to follow if you have your accounts spread out, however by having your accounts in one place you can easily keep track of changes that can impact your money.
  • Special perks. The bigger your account, the bigger the perks you may receive. Some companies will reward bigger account holders with free services or reduced fees and commissions.

Making an informed decision.

There are many benefits associated with consolidated financial accounts, however this step may not be right for everyone.  It is important to consider both the advantages and disadvantages of any moves you make in regards to your personal finances.  What works for one situation may not work for another making it all the more important to make an informed decision.

Categories
investing

Compare Traditional and Roth IRA

Two of the most popular and easily recognized forms of retirement accounts include the tradition and Roth IRA.  IRAs differ from employer sponsored retirement account such as a  401k or 403b, which can only be opened through a relationship with an employer. An individual retirement account (IRA) can be established by any individual or married couple that meets the eligibility requirements. See IRS Publication 590 for specific details.

There are several similarities between the traditional and Roth IRA, but they are in fact very different options for those looking to save toward their retirement.  It is important to recognize what these differences are and how they will impact your savings strategy before you begin contributing to either type of account.  Consider the following tips to ensure you are selecting the best account to meet your current and future needs.

Compare Traditional and Roth IRA

Features of the Traditional IRA

Eligibility: There are no income restrictions limiting who can contribute to a traditional IRA.  The only eligibility requirement you must pass is age, that being under 70 1/2 at the end of the calendar year in which you make contributions.

Contributions: Contributions must be made from taxable compensation.  This means the money that you put into your traditional IRA must be from wages earned, bonuses, commissions or self-employment.  You may not use investment gains, royalties, rent payments or other non taxed compensation to contribute to a traditional IRA.  (Some service members maybe able to contribute to a traditional IRA with non-taxed combat pay under the HERO Act).

Taxes: Contributions to a traditional IRA are made with pre-tax dollars.  When the time comes to file your income tax return, this will reduce your taxable income which offers immediate tax advantages.  This allows for tax-deferred savings, however it is important to note that when you take distributions from the traditional IRA you will be subject to taxation.

Distribution: To avoid early withdrawal penalties, distributions must be made from a traditional IRA after the account owner has reached age 59 1/2.  The traditional IRA also has a mandatory minimum distribution age of 70 1/2.  This means the account holder must begin taking minimum distributions at age 70 1/2 or risk losing up to half of the minimum distribution to the IRS as a penalty.

More information from the IRS: traditional IRA.

Features of the Roth IRA

Eligibility: Before considering a Roth IRA understand that there are income requirements that must be met before you can establish and contribute to this type of account.

Contributions: Contribution rules for the Roth IRA are the same as the traditional IRA.  They must be made from taxable compensation as listed above.

Taxes: What many consider the biggest advantage of the Roth IRA is how it is taxed.  Basically you pay tax on your contributions at the time of contribution, therefore you are free and clear of taxes on qualified distributions from this type of account.  This can be a very attractive feature for those who do not want to worry about paying taxes at a later time.  It also makes the Roth IRA a bit more flexible than the traditional IRA in terms of withdrawals.

Distribution: Since you have already paid taxes on contributions to the Roth IRA, they can be withdrawn at any time without taxation.  Earnings from the account cannot be taken prior to the account being open for five tax years and the account holder reaching age 59 1/2 without penalty.  Money can remain in the account for the remainder of your life, due to the fact that there are no age limits when minimum distributions must be made.

More information from the IRS: Roth IRA.

Categories
banking

Ally Bank Bows to FDIC, Slashes Rates

Should a well funded bank be able to set their own interest rates to attract new customers, or should they bend to the pressure from the Federal Deposit Insurance Corporation (FDIC) to lower interest rates? If you support the free market, your answer would probably be no. But that is what recently happened when the American Bankers Association (ABA) sent a formal letter of complaint on behalf of its members to the FDIC.

The complaint stated that Ally Bank was offering higher interest rates than its competitors, and that Ally Bank had plans to receive funds through the Treasury Liquidity Guarantee Program (TLGP).

The FDIC’s Temporary Liquidity Guarantee Program backs financial institutions and allows them to borrow money at near-Treasury rates in exchange for a fee. Because Ally has been approved to borrow money from the TLGP, some ABA members complained they were using the TLGP funds to attract new customers by offering higher interest rates that was reasonable in the current economic environment.

Should the FDIC control interest rates?

The government shouldn’t regulate every aspect of private industry, but the lines become less clear when there are government bailouts or even government ownership on the line. The FDIC responded to the ABA’s letter by sending a letter of their own to Ally Bank, essentially telling them to lower interest rates so long as they participate in the TLGP.

What does this mean for Ally Bank members?

Overall, not much will change except interest rates. Ally Bank accounts are still covered by the FDIC so there should be no problems with customer funds no longer being guaranteed, and there should be no other differences noted by customers. Unfortunately, it means that new customers who were lured by the promise of higher interest rates will see them fall a little bit – through no fault of Ally Bank. It’s just an unfortunate change of events from a customer perspective.

Categories
banking

Ten banks paying back TARP early

Ten major US banks received approval to repay Troubled Asset Relief Program (TARP) funds early, potentially leading to a repayment of $68 billion in taxpayer bailout money. The Treasury Department did not disclose which 10 banks were given approval for early TARP repayment. However, several banks have already publicly stated their intention to pay back the TARP funds if given approval.

Banks paying back TARP early

Some of the banks who are thought to be paying back their TARP funds early include Capital One, BB&T, and U.S. Bancorp, and most of the banks that it was determined would not need new capital after the bank stress test results were released last month. Those banks include Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon, JPMorgan Chase & Co., and State Street.

So far, the only banks the US Treasury department has allowed to pay back TARP funds have been small banks, totaling almost $1.9 billion.

Paying back the TARP funds is like kicking a bad habit

The banks can’t wait to get rid of the TARP funds because of increasing restrictions and limitations imposed by the government. To get rid of the TARP, banks were required to raise billions of dollars in funds to ensure they had enough reserves to weather substantial losses.

Overall, this should increase the banks’ flexibility in dealing with the economic crisis.

Categories
banking

$250k FDIC Deposit Insurance Extended to 2013

The Treasury Department recently approved the FDIC’s request to extend the temporary deposit insurance limit of $250,000 from the end of 2009 to 2013. This move was made to add stability to the banking industry and instill more consumer confidence in our economy.

Until last year, the FDIC insurance deposit limit was $100,000. However, consumer fear and failing banks lead to the approval of a temporary increase in insurance coverage. The $250,000 limit was set to expire at the end of 2009, but now has added life.

According to the FDIC, on January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except for IRAs and other certain retirement accounts which will remain at $250,000 per depositor.

National Credit Union Share Insurance Fund (NCUSIF) insurance limits have also been extended through the end of 2013. The NCUSIF protects money held at credit unions and is administered through National Credit Union Administration (NCUA). The limits are also $250,000 per account and are set to return to previous levels on January 1, 2014.

The FDIC and NCUSIF protect your money

Thanks to the FDIC and the  NCUSIF, no protected account at a bank or credit union has ever lost money due to a bank failure. For more information about how the FDIC works, check out this great video: Watch the FDIC Takes Over a Bank.

Categories
referral bonuses

USAA Bank $100 Checking Account Bonus

usaaUSAA Federal Savings Bank is offering a $100 sign up bonus for new checking accounts. The kicker is that you must be eligible for their property and casualty insurance. United Services Automobile Association (USAA) is an insurance company that offers financial services including banking, investing, credit cards, and other financial products.

About USAA

There are two things that set USAA apart from other financial institutions. The first is that USAA was founded for military officers and continues to have fairly strict eligibility requirements – basically you must be in the military or be the adult child of a current USAA member. The second thing that sets USAA apart from other financial institutions is their consistently high ratings for financial products and customer service. They are often rated number one for best credit cards, customer service, brokerages and more. You can read a USAA Federal Savings Bank review for more information.

$100 USAA Checking Account Bonus

All you need to do receive the $100 bank referral bonus is follow these steps:

  • Open a new Four Star Checking account online or by phone (800) 531-8132 (mention offer code)
  • Use Offer Code: CEO 100.
  • Deposit a minimum of $25.
  • Set up direct deposit.
  • The offer expires 5/31/09.
  • Receive $100 bonus in December 2009.

Other notes:

Offer is not available to current USAA checking account holders and excludes Teen Checking accounts. Limit one $100 bonus per household.

The $100 bonus will be credited to your account in December 2009 if your Four Star Checking account has active recurring direct deposit.

Like all bank referral bonuses, this bonus is considered interest and will be reported on IRS Form 1099-INT.

Categories
referral bonuses

Get a Free Garmin GPS at Key Bank

Key Bank is offering new customers a free Garmin GPS for signing up for their free checking account. It’s a pretty sweet deal if you live in one of the states where Key Bank operates!

Get a Free Garmin nüvi 205W GPS

Key Bank is offering new checking account customers a FREE Garmin® nüvi® 205W GPS when you open a Key Express Free Checking account or a Key Advantage® Money Market Checking account. You will also need to make one debit card transaction plus a combination of two direct deposits and/or automated payments each of $100 or more.

Get a Free Garmin nüvi 265WT GPS

Key bank is offering a higher model GPS system to new customers who sign up for any of the following checking accounts: Key Privilege® Checking and Key Privilege Select Checking.

The requirements for the free Garmin® nüvi® 265W GPS are the same – make one debit card transaction plus a combination of two direct deposits and/or automated payments each of $100 or more. However, there is a $25 monthly service charge for the Key Privilege Checking accounts unless you maintain a minimum balance of $25,000.00 in any combination of checking, savings, CDs, retirement deposits, investments, credit cards, loans and lines of credit. The Key Privilege Select Checking account requires a minimum balance of $100,000 to avoid monthly service charges.

Unless you are already a Key customer, you would probably be better off getting the free Garmin 205 GPS and putting your money into a high yield savings account to earn better interest rates.

Get your free Garmin soon!

You must open a qualifying checking account at KeyBank by May 15, 2009 and meet the other requirements (debit card transaction and 2 direct deposits or automated payments of $100+) by July 17, 2009. I noticed they have extended this deal twice already, so it is possible they will do it again – but probably only until their supplies are exhausted. So take advantage while you can!

Here are the official details. Note – only available in the following states: Alaska, Colorado, Connecticut, Florida, Idaho, Indiana, Kentucky, Maine, Michigan, New York, Ohio, Oregon, Utah, Vermont, and Washington.

*Like all bank referral offers, the value of the GPS will be reported on your 1099.

Categories
banking

Banking News Update

There has been a lot of action lately in the banking industry and the stock markets. I recently wrote about how fair value accounting could boost the value of bank stocks. Since then, much of the banking industry has been on a tear – in some cases climbing 30% or more. I’m not recommending that anyone invest in bank stocks though. Always do your due diligence before investing in any stock or industry.

Profits up for some banks

Last week Wells Fargo announced they were expecting a $3 billion profit – which was a pleasant surprise for the banking industry. Both Citigroup and Bank of America also recently announced that they operated at a profit during the first two months of the year.

Still some dangerous times for banks ahead

While some of these banks are currently operating at a profit, they also have a lot of toxic assets remaining on their books. The operating profit does not include such items as reserves for credit losses, nor does it account for troubled assets that may not be repaid in the future. The results look good now, but charge offs and failed mortgages and other debts could cause big problems down the road. Many banks are going to need to continue raising capital to hedge against loan defaults.

Related High Yield Savings Account information.

A previously published article, How the FDIC Takes Over Banks, was recently included in the Carnival of Pecuniary Delights No. 3 – The Money Box Edition, which was held at Miss Money.