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About Richard Barrington, CFA & Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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Taking IRA distributions after a divorce?

August 28, 2014

| Senior Financial Analyst, CFA

Q: I have $18,000 in an IRA money market account. It was half of my ex-husband's IRA that was transferred to me via judge's orders. If I take a few thousand out, do I have to pay taxes on it?

A: This is a complex situation with several variables, so you would be wise to consult a tax expert with the particulars. However, the following are some of the key issues in play:

  1. Your age. The critical number here is 59 1/2 -- and older is better. If you are younger than 59 1/2, most likely you would incur a 10 percent penalty on any distribution from the IRA, on top of any ordinary tax liability the distribution would trigger. That extra penalty is so onerous that most experts advise against taking early distributions from an IRA. So, if you are younger than 59 1/2, you might want to stop right here and decide to leave the money in the IRA, keeping in mind that you can change investment vehicles while keeping the money in an IRA if the money market account is not meeting your needs.
  2. The type of IRA. There are two types of IRAs: Roth and traditional. On a Roth IRA, tax has already been paid on the contributions, so you would just owe tax on any investment earnings in the plan when those earnings are distributed (i.e., withdrawn from the IRA). In a traditional IRA, the entire amount of the distribution is treated as income for tax purposes.
  3. How long the plan has been set up. If it is a Roth IRA and you have had it for less than five years, you may incur the 10 percent early distribution penalty if you make withdrawals before the account's five-year anniversary.
  4. Cost basis. If the account is a traditional IRA, cost basis should not be an issue, since there is no distinction between prior contributions and investment earnings. In a Roth IRA though, that distinction matters, and you might want to consult with a tax expert to determine the cost basis because the transfer from your husband could complicate that.

The biggest factor here is whether you are older than 59 1/2, because if you are younger than that you could be incurring both taxes and a penalty. However, whether this is a Roth or a traditional IRA is also critical, because it determines whether taxes have already been paid on the original contributions to the account. In that context, it would seem that a Roth IRA would have more long-term economic value than a traditional IRA as part of a divorce settlement, because the traditional IRA would carry a bigger future tax liability.

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Should I switch out of my IRA?

August 22, 2014

| Senior Financial Analyst, CFA

Q: I have $47,000 invested in an IRA. The new rate will be 0.80 percent as of September 14. I am unsure whether it would be best to roll this over for another year, or switch it to a CD with a 0.80 percent rate for one year. What do you think?

A: Perhaps the key issue here is flexibility. This is not simply a question of whether to keep your money in an IRA, but also whether a one-year CD is the best vehicle for you at this juncture.

Here are some issues related to investment flexibility for you to think about:

  1. Is one year really the right time frame for you? It seems like under the circumstances you describe, you might benefit from going either longer or shorter. For example, some of the better savings accounts and money market accounts can provide you with a 0.80 percent interest rate, without locking you in for a year. That might prove useful if you believe that interest rates may rise in the near future, or if you anticipate a shorter-term liquidity need. On the other hand, if you don't need that kind of flexibility, why not go to a longer-term CD than one year, which would give you access to higher interest rates? The key there would be to look for a longer-term CD with a relatively low early withdrawal penalty, so you would not have to completely sacrifice flexibility for higher interest.
  2. Does your current IRA provider give you access to the best CD rates? It sounds as though you are already in a CD within your current IRA, and most other banks offering CDs can probably do so within an IRA account as well. So, if the issue motivating you is simply having the flexibility to shop for the best CD rates, you should be able to do that by transferring to an IRA at another bank once you find a rate you like.
  3. What would you gain by taking the money out of an IRA? Unless you have a traditional IRA and are at the age where you need to take required distributions (70 1/2), there seems little reason for you to incur the tax consequences of transferring out of an IRA. Since you have the flexibility to shop for rates within IRAs, is there a reason for you to give up the tax advantages?

Until you actually need the money, it's hard to see why you would move away from your IRA. In the meantime, the question is really about investment flexibility. This you should be able to achieve within an IRA, though it might mean choosing something other than a one-year CD -- or choosing another IRA provider.

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Is a townhouse a good investment?

August 15, 2014

| Senior Financial Analyst, CFA

Q: My wife and I are currently renting, but we just saw a townhouse for sale in California wine country that would be perfect for us. However, the only way we could buy it would be if I borrowed from my 401(k) to make the 3.5 percent FHA down payment. Is that a terrible idea? Also, are townhouses good investments, and is this a good time to buy?

A: Breaking your question down into its component parts, here are some answers to the issues you have raised.

  1. Is borrowing a down payment from a 401(k) plan a good idea? Your need to borrow for a relatively small down payment raises some questions about your cash flow. Borrowing from a 401(k) means you will miss out on any investment earnings while you are repaying what you borrowed. If you have to borrow against your 401(k), you should have a budget plan for repaying the amount in as little time as possible, and if you have been unable to save up for a down payment, you also might find it difficult to repay your 401(k) plan in an accelerated time frame.
  2. Is a townhouse a good investment? With any property, the keys from an investment standpoint are the pricing and the location, but with a townhouse you are in effect buying into the association that runs the complex. Beside checking out the current fees, you should ask about what those fees have been historically, so you can get a feel for how quickly they are rising. Also, spend some time around the complex, so you can see whether it is well-maintained and whether you will be comfortable with your neighbors.
  3. Is this a good time to buy? California is home to some of the nation's most expensive real estate markets, but at least prices are not yet back to the peak levels of the housing bubble. Perhaps the thing that most makes this a good time to buy are current mortgage rates. Those rates are still among the lowest in history, so you would be getting a break on borrowing costs. Current mortgage rates have only a slim margin over a rising inflation rate, so you might not want to count on rates staying as low as they are now.

Real estate is an especially hard market to predict, in large part because each property is somewhat unique. However, what matters most when buying a home is not where the value might be in five or 10 years, but how readily the mortgage payments fit into your budget. Only if you can comfortably make those payments -- and especially if they compare favorably to your rental expenses -- does the decision to buy make sense for you.

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Why do interest rates vary in different markets?

August 7, 2014

| Senior Financial Analyst, CFA

Q: Why do interest rates vary in different markets?

A: To answer this question, it might help to start with the components that make up interest rates, and then describe some of the things that cause those components to vary.

First, to get one factor out of the way, length is important in setting interest rates. The longer the loan or the bond, the more uncertainty there is about the future, and higher rates are generally the way that greater uncertainty is reflected. However, that does not account for differences in rates for instruments of essentially the same length. Market forces act on the various components of interest rates to create these differences.

The following are key components of interest rates:

  1. Inflation expectations. Any lender wants to get at least as much purchasing power back at the end of the loan as the principal was worth at the beginning. So, one component of interest rates is an amount intended to keep pace with the expected rate of inflation.
  2. Default risk. The less reliable the borrower, the greater the risk of default. Some component of the interest rate reflects the percentage chance that future interest or principal payments will not be made.
  3. Profit margin. The above two components are designed to make sure lenders do not lose money, but people do not lend money just to break even. Some component of the interest rate is designed to represent a profit after inflation and default risk are covered.

None of the above components is a constant, and here are some things that cause them to vary:

  1. Inflation environment. Expectations about future inflation are very much a function of the recent inflation environment, so at times when inflation has been low, interest rates will generally be low as well.
  2. Credit quality. The more reliable the borrower, the less of a default premium is needed. This is one reason why savings accounts that are backed by FDIC insurance generally have some of the lowest interest rates in any given environment.
  3. Economic strength. This is a supply-and-demand factor: The stronger the economy, the higher the demand for capital, so interest rates will be higher when the economy is thriving. Current mortgage rates and the interest on savings and money market accounts reflect the persistently iffy economy since the Great Recession.

Within any one nation's markets, the first and third of these factors will be pretty much the same across all issuers, so credit quality becomes a major factor in determining interest rate differences within domestic markets. When it comes to international markets, the inflation and growth environments can vary greatly from one country to the next, which is why interest rate differences can be especially large across national boundaries.

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Should I give up my bank for bitcoins?

August 1, 2014

| Senior Financial Analyst, CFA

Q: With interest on savings accounts near zero and checking account fees going up all the time, would I be better off with an alternative like bitcoins? I see that more and more places are accepting them for payments.

A: Many people share your frustration with traditional banking, but that does not mean that Bitcoin is a good alternative.

Here are some of the things you would be giving up if you traded your bank accounts for bitcoins:

  1. FDIC insurance. You can argue whether Bitcoin is the wave of the future or a speculative fad, but you really cannot argue that bitcoins and deposit accounts resemble one another in any meaningful way. Deposit accounts at FDIC-member institutions are guaranteed up to $250,000 -- a level of security you cannot get with alternative currency investments.
  2. Regular interest. Sure, interest rates on savings accounts and other deposits are frustratingly low, but at least they offer interest. Bitcoin speculators are betting that the value of bitcoins will rise as more and more people buy into the concept. Remember though, that's also the principle by which people hope to make money in Ponzi schemes.
  3. Stability. It is one thing to not pay interest, but another crucial difference between a deposit account and Bitcoin is the wild swings in the value of the Bitcoin. You may not like checking account fees, but how would you feel if your balance was worth $500 one month and $300 the next, simply because the value of the Bitcoin changed?
  4. Widespread acceptance. You mention seeing more and more places accepting bitcoins, and it does seem that every week or so there is a news article about a retailer agreeing to accept them as payment. However, the fact that this is considered news means the Bitcoin is still far from enjoying universal acceptance.

Ultimately, it is difficult to view an investment in bitcoins as anything other than speculative, because procedures for managing the currency are still being formulated -- as are the regulations that govern it. Because New York State is home to many Bitcoin-related firms, it recently proposed the first wave of Bitcoin-related regulation. However, if regulation evolves on a state-by-state rather than a national basis, it could put a damper on the free exchange of this alternative currency.

If you find your interest rates too low and your checking account fees too high, take out your frustrations on your current bank -- not on all banks. Shop around and chances are that you can find both free checking and a higher savings account rate. After all, if security and liquidity are what you want, you probably should not be a Bitcoin pioneer. Remember, pioneers are often the ones with the arrows in their backs.

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