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Ask The Expert

About Richard Barrington, CFA & MoneyRates.com 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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Should I sell before HARP expires?

January 16, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: I have a second home that I'm looking to sell, but I've been holding onto it because home prices are rising. Still, I know that some of the recovery has been due to government programs, and that a major one of these programs, HARP, is set to expire this year. Should I get the house sold before this program runs out, or do you think the government will take other steps to boost the housing recovery?

A: While the Home Affordable Refinance Program (HARP) is slated to expire at the end of this year, there are other programs and conditions in place that favor homeowners.

HARP allows certain borrowers who owe more than their loan balances to refinance. With current mortgage rates exceptionally low, this allows those borrowers to take advantage of favorable refinance rates, and thus helps stem the tide of foreclosures. Thus, it does not create new demand for housing, but it does slow the supply of distressed properties on the market.

Beyond HARP, there are three things that favor home prices, all of which are at least in part the product of government initiatives:

  1. The FHA has slashed mortgage insurance premiums. The 50 basis point cut to these premiums has the same effect as a 50 basis point drop in mortgage rates.
  2. The Federal Finance Housing Agency (FHFA) has given the green light to 3 percent down payments. By allowing Fannie Mae and Freddie Mac to back these mortgages, the FHFA aims to make low down payment loans much more widely available.
  3. Mortgage rates remain near record lows. Remember, Federal Reserve policy helped current mortgage rates reach such low levels in the first place, and the Fed is being cautious about how it unwinds its low-interest-rate policies.

The first two items on the above list are relatively recent developments, demonstrating that even with the worst of the housing crisis now a few years behind them, government agencies are still actively finding ways to support the housing market. So, the biggest risk you may be taking by waiting to sell a house is economic risk.

From an economic standpoint, you have to hope mortgage rates can continue to walk a sort of tightrope. Too much economic growth could send mortgage rates sharply upward, whereas if the economy drifts back toward recession, you could see housing demand dry up.

In assessing this economic risk, be sure to take into account the local nature of real estate. If you are in an area that is struggling more than most -- for example, an area whose economy will be hit hard by lower oil prices -- you may not want to risk waiting much longer to sell your home.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Should I deposit more to avoid a statement fee?

January 13, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: After 10 years with the same bank, my bank is threatening to charge me $5 a month to continue to receive paper statements. I might understand if this were a checking account, but it is a savings account with virtually no activity. I can avoid the fee if I bring the balance up to $10,000. I have $10,000 available, but I hate to feel like I'm being extorted to deposit more money with them. Am I being unreasonable?

A: Your feelings are perfectly understandable. No one likes to suddenly be charged for something they are accustomed to getting for free. With that said, it is important to respond rationally rather than emotionally. The situation you describe is occurring more and more these days, and it is a function of the business dynamics of the banking industry. Just as they make a business decision about what kind of new fees to charge, you need to make a business decision about how your banking needs can be best met.

The important thing is that you should avoid paying that fee. That $5 monthly fee will cost you $60 a year, and given how low interest on savings accounts is these days, that fee could wipe out most if not all of your annual interest. With that in mind, here are some options to consider:

  1. See if the bank offers a paperless option. Some banks that charge a fee for paper statements also offer the option of getting statements online for no fee. Even if you like to have a hard copy of your banking records, that can be easily accomplished if you have a printer at home.
  2. Meet the minimum balance requirement if the interest rate is competitive. You could deposit enough money to meet the $10,000 threshold for waiving the fee, but you should do this only if that money is going to be earning a competitive interest rate at your bank. Otherwise, you may be avoiding the fee but costing yourself interest.
  3. Shop around. If your bank's interest rates are not competitive enough to justify an additional deposit, start shopping for a new bank. It is likely that you can kill two birds with one stone, by both avoiding the statement fee and finding a higher savings account rate.

People often remain with the same bank simply out of inertia. However, one thing that can trigger a change is a new fee policy, so you should look at this as an opportunity to review and potentially upgrade your banking situation. You may find that you can not only avoid that new $5 fee, but also improve your interest rate.

Got a question about savings, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Do I have to withdraw from my IRA?

December 30, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: I will turn 70 1/2 on December 30, 2015. Will I have to take a required minimum withdrawal from my IRA for that year? Would it be a lump sum because of the late date, or monthly beginning in January of 2015?

A: Traditional IRAs are designed to be drawn down over the course of their owners' retirement years. This is important because of the tax benefit involved with an IRA. Money in a traditional IRA has never been taxed, so the IRS wants that money to be taxed as income before the owner dies. This where the requirement for minimum withdrawals comes in.

The pace at which money has to come out of a traditional IRA to be taxed is determined by an IRS formula for Required Minimum Distributions (RMDs). You can get details on the formula at irs.gov, but here are some important things you should know about applying that formula to your situation:

  1. The minimum distribution requirement applies only to traditional IRAs. You did not specify in your question, but if yours is a Roth IRA then RMDs do not apply.
  2. You have until April 1 of the following year to take your distribution. You won't have to begin taking distributions in January 2015, and can actually wait until April 1, 2016.
  3. You can reduce your minimum distribution if your spouse is more than 10 years younger than you. A different RMD table applies in that situation, and it can help you keep money in the IRA longer if you are interested in prolonging the tax benefit.
  4. You can take more than the minimum distribution if necessary. It is important to remember that the RMD is a minimum, but it's not the only option you have. If you need more money to live on, you can withdraw from your IRA at a faster rate. The drawbacks are that this may deplete your resources too soon, and will subject the money to taxation more quickly.
  5. Don't be afraid to reinvest any excess. If you do not need all of the RMD amount to live off, there is no reason not to find appropriate investments for the excess, since your IRA will be providing regular liquidity in the years to come.

As much as people don't like being forced to take RMDs because they result in the money being taxed, it is actually a nice problem to have. Withdrawing the money because the IRS requires it rather than because you need it means you already have more than enough to live on -- and that's not a luxury all retirees can claim.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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How much can I contribute to my money market IRA?

December 11, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: What is the maximum annual amount I can contribute to my money market IRA account?

A: There are some variables to this, so you should probably got to the IRS website to check out the details of your situation. However, in general terms these are some of the key limits:

  1. The standard IRA contribution limit for 2014 and 2015 has been set at $5,500.
  2. The government recognizes that many Americans have lagged behind on their retirement savings, so you can contribute an extra $1,000 a year if you are aged 50 or older, bringing the total maximum annual contribution to $6,500.
  3. You cannot contribute to a traditional IRA in the year when you will reach age 70 1/2. You can, however, contribute to a Roth IRA regardless of age.
  4. The amount you can contribute is not necessarily tax deductible. Most notably, if you or your spouse are covered by a retirement plan at work, then your ability to deduct your IRA contribution might be limited or disallowed completely. The nature of these restrictions depends on your income, your tax filing status, and how you are covered by the employer's plan, so be sure to see the IRS website for details.

With regard to an employer-sponsored plan, people are sometimes torn between whether to contribute to an IRA or to their retirement plan at work. Ideally, you could maximize your tax advantages by contributing to them both, but people cannot always afford to do that. So, if you have to choose, here are some of the factors you should consider:

  1. Whether there is an employer match. If your employer makes a full or partial match of contributions to your retirement plan, then you should contribute enough to that plan to get the most out of this match.
  2. The range of investment options open to you. Your employer's plan may have investment choices that you would not have access to individually. On the other hand, you may not want to be limited to the menu of choices your employer has chosen.
  3. The fees associated with the retirement plan compared with the fees on an IRA account.

Finally, while you happen to have specified a money market IRA account, keep in mind that you are not limited to investing your IRA in a money market account. In particular, if you have a long time to go until retirement, you may want to put some of it in growth vehicles -- especially given the low level of rates on money market and savings accounts these days.

If you do decide to keep it in a money market account, be sure to make the best of today's rate environment by shopping around for the best money market account rates.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Will bonds return to their former yields?

December 8, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: I'm doing some retirement planning, and trying to figure out what return I can assume my investments will earn. We have a blend of stocks and bonds, and for years we always assumed this would be good for 8 to 10 percent from the stock portion, and 6 percent from the bonds. Now though, with the bonds yielding between 1 and 4 percent, does that mean there is no chance of them earning 6 percent over the long term?

A: While it is possible that bonds could produce a total return of 6 percent over the long-term, with yields now much lower, the odds are against it and lowering your return assumption would be prudent. A look at some of the dynamics involved in bond returns will help explain this further.

First of all, there are two kinds of yield: income yield and yield-to-maturity. Income yield is the amount of interest the bond pays annually as a percentage of its current price, while yield-to-maturity takes into account both the income yield and the shift from the bond's current price to its par value between now and maturity. If you hold the bond to maturity, yield-to-maturity is more or less the total return you will get.

Over shorter-term periods, a bond may have a higher return than a yield to maturity. A drop in interest rates could boost its price, though the odds are against much of a decline in interest rates from today's levels. For lower-quality bonds, an upgrade in credit rating might give them a short-term price boost. However, these higher returns would only be over interim periods; if the bond is held to maturity, the total return would smooth out to roughly the yield-to-maturity at which the bond was purchased.

Treasury yields currently range from 0.2 percent to just over 3 percent, with longer durations providing the higher yields. Ironically though, if you want to exceed 3 percent over the long run, your best chance might be in shorter-term bonds. Long bonds will be hard-pressed to produce a total return exceeding their yield-to-maturity, but short-term bonds will have several opportunities to roll over and thus would benefit if interest rates rise.

If you want to pursue a strategy of rolling over short-term investments in the hopes that interest rates will rise, you might consider savings accounts or CDs as an alternative to bonds. These can provide you with a U.S. government guarantee like Treasuries, but the best CD and savings account rates today exceed the yield on Treasury securities of similar durations.

But again, while there are things you can do to manage your income return, lowering your return assumptions would be prudent to keep your retirement funding on track.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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