Last Week’s Question of the Week: How much can you contribute to your IRA in 2020 if you are 45 years old and have $10,000 in earned income?
ANSWER: Contributions to an IRA will remain the same for 2020, which is $6,000 if you are under 50.
HOST: I know you spend a lot of time trying to help people with trying to get their best investment results. But what should people be doing with their safe money, their emergency money? Where can they make a decent return?
KLAAS FINANCIAL: This is a great question that we are asked almost every week. The first part of the question revolves on “safe places” which let’s begin with it is NOT under your mattress, because supposedly that is the first place people do look if they were to be in your house looking. If you are going to safely keep money in your house, be more creative and also share this info with another trusted family member, in case you forget where you put it.
Where can you put “SAFE MONEY” that you won’t lose and perhaps want to make some interest with.
Bank Savings Accounts – Again this is for money that you don’t need to access regularly; these accounts are not tied to investment risk, and you are able to withdraw your savings as needed.
- Main Benefit: All savings accounts in banks are covered by the Federal Deposit Insurance Corporation (FDIC) which insures your deposits for up to $250,000 PER ACCOUNT and PER Depositer, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank. What that means is if the bank were to fail, the FDIC will make arrangements for you to get your money back. They are ideal for emergency funds.
- Main Drawback: No risk, no reward, which means that while you have no risk of losing money, that means you will also receive minimal reward or interest for your money. Interest rates earned on bank savings are likely to be lower than inflation rates…however some banks do offer high-yield savings accounts.
- Consider: Looking at long-established internet banks which offer the same level of protection, and often offer much higher interest rates than a bricks and mortar bank down the road. Online savings accounts currently offer yields of around 2% or more. You can find higher-paying accounts on websites such as Bankrate. Make sure you check the minimum deposit required, fees and features such as ATM access and check writing. Some may limit your monthly withdrawals before imposing a fee.
Certificates of Deposit (CDs): These are also offered by your bank and they have a specific maturity date. Rates are currently hovering at traditional banks between .48%- .96% for 1,3, 5 year CDs. Online banks are currently ranging from 2.15% to 2.25% depending on the length of the term.
- Main Benefit: At maturity, the face value is returned with any accrued interest owed and like saving accounts, CD’s have Federal Insurance limited by the issuer and account. Same as saving accounts, the FDIC insures up to $250,000 per issuer per account. What that means is you could have CDs issued by several different banks and hold them in different accounts to get this insurance coverage. Minimal CD investments tend to be $1000 and any amount after that in the same increments. Some banks have $25,000 minimums. Biggest difference between Savings and CD accounts: rates are somewhat higher because you agree to leave your money in the CD until the maturity date. CDs are issued by banks or through brokerage companies. You can also consider CD laddering which allows you to have some money available in the future, coming with different due dates.
- Main Drawback: If you need your money before the maturity date, you may get less than what you put in. Align your due dates with your needs.
HOST: What about money market deposit accounts? Are those offering better rates for this kind of money?
KLAAS FINANCIAL: Sometimes MONEY MARKET DEPOSIT accounts may be offering around 2.5%, and are like savings accounts with similar benefits, but also with some additional benefits and restrictions.
Money Market Deposit Accounts
- Main Benefit: Money market deposit accounts often have more rate stability than in an online savings accounts and often better rates for higher rate tiers of balances. They are also insured like savings accounts, $250,000 per individual holder/ per account.
- Main Drawback: They all differ in the features they offer (some offer debit cards or check writing and others do not.) You do want to check out the financial health of any bank or financial institution that you maybe considering opening an account at.
Money Market Mutual Funds: A money market mutual fund is a type of fixed income mutual fund that invests in debt securities characterized by their short maturities and minimal credit risk. Money market mutual funds are among the lowest-volatility types of investments. Just to be clear, they are different that money market deposit accounts.
- Main Benefit: They are convenient to use and they are considered low-risk in how they are invested.
- Main Drawback: They are not insured by the FDIC.
High-yield Reward Checking Accounts: These offer relatively high interest and are Federally Insured for the $250k. BUT the community banks and credit unions that offer them may make you jump through a lot of hoops, with multiple debit card transactions, direct deposits, initial deposits.
HOST: What about purchasing Savings Bonds?
KLAAS FINANCIAL: When we are discussing best places to earn some interest on your safe money, we are generally looking for safer alternatives, liquidity when possible (short holding periods), and the least complicated way to accomplish this. Savings bonds somewhat work for the safe part, but not really for the liquid part. Here’s a quick primer however, for what to know.
SAVINGS BONDS: While CDs can be thought of as loans to banks, U.S. Savings Bonds are like 30-year loans to the government. Some people would add free loans, since the interest rate is quite low. With Series EE, the interest rate is based on yields of 5-year Treasuries and resets every six months.
- Advantages: The biggest advantage of savings bonds is the absolute security of them. They’re issued directly by the U.S. government and are backed 100 percent by its “full faith and credit.” Savings bonds are subject to income tax only at the federal level, not at state or local levels. However, if your state has any estate or inheritance taxes, the bonds are subject to them.
- Disadvantages: The biggest disadvantages of savings bonds are the relatively low yields and the inflexibility. The rate has been below 1% for years, you will pay a penalty if you withdraw your money before five years and only online accounts are available via TreasuryDirect.gov. There are Series EE bonds: Rates on Series EE bonds issued between May and October 2019 earn just 0.1 percent. Meanwhile, Series I bonds issued between May and October 2019 offer a yield of 1.9 percent, and this yield will fluctuate depending on the Consumer Price Index.
HOST: Now we turn to the Listener’s Corner… Jack wrote in with the following question: “I am considering retirement in the next two years and have heard that I might have an option of taking my pension as a lump sum? Is this a good idea to consider?”
KLAAS FINANCIAL: Thanks for the question Jack.
First of all, that is great news that you may have that option. While many pensions do offer a lump sum option or an annuity option that pays monthly income for life, others don’t offer any option. As for what you should do, of course it depends. Sometimes when considering life expectancy, the annuity option may sound like a better choice, however wanting to leave hard earned assets behind for your beneficiaries might be better served with a lump sum option. Be sure to thoughtfully examine your pension choices in light of your ENTIRE financial picture with a financial advisor before you elect a decision that is irrevocable.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.