Ask The Expert
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.
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May 9, 2016
Q: Why are oil and gold and so many other commodities priced in U.S. dollars, regardless of where they come from? Is this an advantage or a disadvantage for U.S. investors?
A: The U.S. dollar is the world's trading and reserve currency of choice, and while that is a sign of strength, it also has its drawbacks.
Why is the dollar so dominant?
The U.S. has the world's largest economy, and while the U.S. has had its share of ups and downs, you would be hard-pressed to find a major economy that has had such consistent growth since World War II. The combination of size and stability makes a very compelling argument for using the dollar as, in effect, the international language of finance.
Is the dollar's popularity a blessing or curse?
You ask if that is good or bad for U.S. investors, and the answer depends on your perspective.
Being used so ubiquitously creates demand for the U.S. dollar, which helps support its value. That is good for U.S. consumers who pay less for imports than they would if the dollar were weak.
It is not so good for U.S. companies trying to compete with foreign companies whose cheaper currencies can give them a pricing advantage.
Similarly, the impact of the dollar's popularity on interest rates is a mixed blessing. Demand for the dollar and dollar-denominated securities helps keep U.S. interest rates low, despite the massive amount of debt racked up by the U.S. government (and individual consumers). You would appreciate the low interest rates if you had recently taken out a mortgage, but you would not be so wild about them if you have a lot of money in savings accounts earning practically nothing in interest.
It can also be argued that cheap borrowing is a form of hazard because it encourages the accumulation of large debts which might become unmanageable, especially if interest rates do eventually rise.
Overall though, most financial people would argue that being the world's trading currency is a positive: It lets investors focus on the supply-and-demand fundamentals of the commodities they are buying, rather than having to also account for currency as an unstable variable.
Will other currencies topple the dollar?
Of course, it is not a given that the dominance of the dollar will last forever. Various currencies have played a similar role in the past, and just as the dollar took over from the English pound in the last century, another currency might someday eclipse the dollar.
After all, there have been challengers. The euro was formed in part to create a multi-national currency with enough critical mass to rival the dollar. More recently, China's yuan currency has gained credibility as its economy has grown, and the country's plan to launch an energy futures exchange this year shows a clear intention to play a role as a trading currency. However, euro countries and now China will have to solve their own economic problems before their currencies are a serious threat to the dollar.
So, for better or worse, the dollar remains on the top of the heap.
Comment: Do you think the dollar will still stay on top in the future?
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May 5, 2016
Q: If you have $500,000 in a Trust Account (owned by one Trustee) but left to 2 adult children, is that account covered for $500,000 by FDIC?
A: The key to this question about Federal Deposit Insurance Corporation insurance is whether the trust is revocable or irrevocable. More than anything else, that determines the extent of FDIC insurance coverage for multi-beneficiary trust accounts.
Revocable vs. irrevocable trusts
Trusts can be revocable or irrevocable.
A revocable trust is one that designates beneficiaries who will receive the proceeds of the trust upon the owner's death, but in the meantime the trust can be terminated or have its terms changed by the owner. One way to think of this is that owners of revocable trusts have prescribed what will happen to the money after they die, but reserve the right to change their minds.
A revocable trust may become an irrevocable trust once the owner dies because effectively there is no longer an option to cancel or change the trust.
An irrevocable trust also has designated beneficiaries, but is not subject to change. Once money is contributed to an irrevocable trust, the owner gives up all rights to cancel or change the terms of the trust.
FDIC insurance limits for trusts
Coverage for revocable and irrevocable trusts is based on FDIC insurance limits of up to $250,000. What varies is how many people that limit applies to.
Revocable trust and FDIC insurance coverage
In a revocable trust, the owner is considered the depositor and the account is only eligible for $250,000 of FDIC insurance coverage. However, if a bank fails after a trust owner has died but before the trust has been paid out or deemed to be an irrevocable trust, the beneficiaries are considered the depositors and each is entitled to $250,000 in coverage.
Irrevocable trust and coverage
In an irrevocable trust, the beneficiaries are considered to be the depositors even before the owner dies, as long as there are no conditions the beneficiaries have to meet to remain eligible for trust proceeds. If that is the case, each beneficiary would be eligible for $250,000 in FDIC insurance coverage. However, trusts are often based on contingent interests, which means that there are conditions the beneficiary has to meet in order to be eligible for trust proceeds. In that case, FDIC insurance is based on the trust as a whole, with a maximum of $250,000.
In effect, the insurance coverage in each case is allocated according to how many people have a right to the proceeds of the account. The living owner of an revocable trust still has control over the account and so is only eligible for $250,000 in coverage regardless of how many beneficiaries there are. Once a trust becomes irrevocable, as long as there are no conditions, the beneficiaries have the rights to the proceeds of the account and so each is eligible for $250,000 in coverage.
There is a useful reference on the FDIC website that will help you trace through how all this applies to your situation. Naturally, any insurance coverage depends on the trust being deposited in an eligible account at an FDIC-participant institution.
Comment: Do you have trust accounts for your children?
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April 27, 2016
Q: I just interviewed for a job and it went well. The potential employer said the next step is to check my references and my credit report. Why my credit report? Is that even fair? I had some credit problems a few years ago, and though I've worked to improve it, I'm sure there are still some issues there. Why should that count against me getting a job?
A: Checking a credit report is a fairly common, though still somewhat controversial, part of the hiring process for many companies. Whether you agree with it or not, here are three reasons why a company might want to review the credit history of prospective employees:
- To see what it says about how you handle responsibility. Companies that extend credit, such as credit cards, rely on people to pay it back. What is an employer to think if they see someone has consistently blown off that responsibility?
- To anticipate a potential source of distraction. People in serious credit trouble spend a great deal of time fending off people they owe and trying to solve their financial problems. If you were an employer, is that what you would want to be foremost in an employee's mind?
- To flag potential security risks. If a job involves financial responsibility, an employer is going to want to know whether an employee is under pressures that would make them especially vulnerable to temptation.
In this case, you know that this potential employer intends to look at your credit report. In general, anyone looking for a job should consider it a possibility.
4 things job seekers should do with credit reports
Here are four steps to take for your job search to better deal with credit issues you may have:
1. Check a recent copy of your credit report
If interviewers are going to be looking at your credit report, you should at least see what they are seeing. You mention having had problems in the past. You need to know which of these are still reflected on the report. In the process of discussing your credit history, you don't want to resurrect issues that have already dropped off your credit report.
2. Fix any credit errors
Errors happen, so get them cleaned up before anyone gets the wrong impression.
3. Submit an explanation of negative marks on credit history
If there are legitimate negative issues on your credit report, you have the right to attach a 100-word explanation of them. Don't try making excuses for everything though. Just point out things that occurred because of unusual circumstances that are not likely to be repeated. Also mention steps you have taken to rectify the problem.
4. Meet the credit issue head on
Whatever credit mistakes you may have made in the past, you should address them openly with any potential employer who asks for permission to view your credit report. You need to demonstrate that you have taken responsibility for your mistakes and have changed your ways.
Chances are, the credit report is not a primary determinant of whether someone gets hired or not. Instead, it is just a piece in the mosaic of things employers consider when evaluating talent.
Comment: How do you feel about employers checking job applicants' credit reports?
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April 5, 2016
Q: Are money market accounts insured by the FDIC?
A: That depends on what you mean by "money market accounts." It is important to distinguish between money market savings and money market funds when determining FDIC insurance coverage.
Money market savings accounts vs. money market funds
The two names are very similar: money market deposit accounts, and money market funds. They are both liquid assets offering similar (generally relatively low) interest rates. However, for all the similarities, there is a critical difference.
Money market savings accounts held at participating FDIC-insured institutions are covered. Money market funds, on the other hand, are a form of mutual fund and as such they are not covered by FDIC insurance.
Why money market funds have restrictions
This lack of insurance for money market funds does more than open up the possibility of losses in those investments. A couple years ago the U.S. Security and Exchange Commission adopted reforms (inspired by the 2008 financial crisis) that could restrict the liquidity of money market funds.
Rules for money market funds
For one thing, the SEC changed accounting rules for money market funds so that their market values can now vary. Therefore, if a fund is trading below what you paid for it, you cannot count on getting all of your original value back when you need it. Also, to prevent runs on money market funds in times of financial stress, the SEC also now allows fund companies to restrict withdrawals under certain circumstances, or impose a fee for those withdrawals. Either of these could impact the availability of your money.
So, generally speaking, both money market deposit accounts and money market funds provide stability and liquidity. However, if you want absolute stability and liquidity, you should look at money market deposit accounts.
FDIC insurance limits for money market accounts
When discussing FDIC insurance coverage, it is always wise to review coverage limits.
For one thing, the insurance only applies to participating institutions, and to certain deposits products. You can find out if a certain institution is has FDIC insurance coverage by using the "bank find" feature on the FDIC website. Banks that are covered by FDIC insurance may offer products that are not covered, so it is important to make sure you are signing up for a type of account which is covered.
Understanding limits for individual, joint accounts
Even in covered accounts, FDIC insurance is not unlimited. Generally speaking, FDIC insurance limits go up to $250,000 for individual accounts, and $500,000 for joint accounts. Even if an individual has multiple accounts at an institution, only $250,000 in total is covered at that institution. You can obtain more coverage by spreading your deposits around to multiple banks.
Other accounts with FDIC insurance coverage
Along with money market accounts, FDIC insurance also covers the following at participating institutions:
- Checking accounts
- Negotiable Order of Withdrawal (NOW) accounts
- Savings accounts
- Time deposits such as certificates of deposits (CDs)
- Cashier's checks and money orders issued by a bank
FDIC insurance is one of those things people take for granted until times when the financial system is under duress. You are wise to check on it now, so you don't have to worry about it when it matters most.
Comment: Do believe FDIC insurance limits for money market accounts are enough for your deposits?
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March 2, 2016
Q: Please tell me where I can get the tax-free account with safe maximum interest rates?
A: As simple as that question may seem, it actually breaks down into three components:
- Setting up a tax-advantaged vehicle
- Defining safety
- Finding the highest interest rates
Here are these three components in depth:
1. Set up an investment vehicle with tax advantages
The best way to approach the tax question is to set up a tax-advantaged vehicle like an individual retirement account (IRA). These allow for a variety of investment products to be used within them, giving you the latitude to choose the product that suits your risk profile and has competitive rates.
Traditional or Roth IRA for tax-free savings?
Within IRAs, you can choose between a traditional and a Roth IRA. The principle difference between the two is that a traditional IRA allows you to defer taxes until you start taking money out of the plan. A Roth IRA requires that you pay taxes up front, but then all your investment earnings and distributions from the account are tax-free.
A major factor in deciding which IRA is right for you is whether you think your tax bracket is likely to be higher now or when you are in retirement. When you are in a relatively low bracket, you can pick the type of IRA that will require you to pay taxes.
As you might gather, these plans are not completely tax free, but they do offer you the opportunity to defer taxes or avoid taxes on investment earnings.
2. Determine which investments are 'safe'
Though several investment products and instruments offer guarantees of principal and interest, the key is to determine who is backing that guarantee. For example, an insurance annuity product may only be as safe as the creditworthiness of the company issuing it.
Are government-backed deposits safe?
Generally, to be completely safe, people opt for investments backed by the U.S. government. This includes Treasury bonds and FDIC-insured deposit accounts.
However, time frame is also a factor. Treasury bonds can fluctuate in value up until the time they mature, so if you have a shorter time frame, this may represent some risk.
Certificates of deposit (CDs) don't fluctuate in value, but if you need to access your money before maturity you may face a penalty. Again, time frame is a factor in determining what "risk-free" means.
3. Locate the highest interest rates
Once you have determined the risk profile and the time frame that suit you, you can compare rates among products with similar characteristics.
How can you compare interest rates?
For Treasury bonds, this is pretty straightforward - Treasuries with similar maturity dates should have similar yields. For deposit products, you have a wide range of choices and bank rates for savings accounts and CDs vary widely.
As you can probably guess, it helps to get the question of how you want to define safe investments out of the way before you start comparing interest rates. That definition will narrow down the field, and allow you to make apples-to-apples comparisons of rates among vehicles with essentially the same risk profile.
Find the best offers and make it easy to find the right low-risk investments for you via the deposits listings provided by MoneyRates.