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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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Will Brexit affect US mortgage, refinancing rates?

September 21, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I've heard commentators say that the Brexit vote should mean lower interest rates here in the U.S. I was thinking of refinancing, but if rates are going lower should I hold off until later?

A: There are a couple of good reasons to believe that Brexit could help keep refinance rates down. However, if you hold off on an opportunity to save money by refinancing, you do so at your peril.

Why Brexit is generally thought to be good for low interest rates

Low interest rates have become the norm in several of the world's major economies, and there are reasons to expect that Brexit will help prolong this trend, especially in the US:

1. Flight to the dollar lowers prices for U.S. consumers

The U.S. dollar got a boost from the Brexit vote, as nervous investors fled securities denominated in the euro and the British pound. A stronger dollar aids the purchasing power of U.S. consumers, which helps keep a lid on prices. Low inflation generally translates to low interest rates.

2. Slower growth encourages low-rate monetary policies

It is expected that the Brexit vote will slow world economic growth, and it is not just Britain and the European Union that are affected. Slower growth abroad means fewer sales for U.S. exporters. The stronger dollar will stack the deck even more against U.S. companies competing against foreign firms. Central banks around the world have been keeping bank rates low in an attempt to stimulate stronger growth. If economic growth takes a hit, expect these low interest rate policies to be prolonged or even expanded.

Why think twice about delaying mortgage decisions

While the compass seems to be pointing squarely towards lower interest rates, here's why you should think twice about delaying refinancing:

1. Current mortgage rates are already extremely low

The need for lenders to cover risk and make a profit means that mortgage rates can only go so low. To some extent, the risk of Brexit may already have been factored into rates, which have been falling throughout this year. There does not seem to be much room for them to fall further.

2. A slower economy could mean less loan availability

While slower growth could well translate to lower rates, the catch is that it could also mean tougher loan approval standards as lenders get nervous about default risk in a weakening economy.

3. Brexit is just one example of a global economic shock

Brexit is an example of how a single event can shake up the world economy, but there is always the potential for a new shock to come along. An inflationary surprise, such as a spike in oil prices or a rise of trade barriers, could send interest rates higher.

If you can save money now by refinancing, you would probably be only mildly disappointed if you found out you could save a little more by waiting till later in the year. However, what you would be likely to regret more strongly is if you missed out on the opportunity to refinance altogether.

Got a financial question about saving, banking, or investing? 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 can I split direct deposits between checking and saving for investing?

September 15, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: You've recommended encouraging savings by having direct deposits go into savings rather than checking accounts, but for the sake of convenience I've split the difference and allocated my paychecks 50/50 between savings and checking. By now, I've seen a considerable accumulation in my checking account, to the point where I feel I should leave enough in checking to keep the account active but invest the remainder elsewhere.

Since depositing half my pay into checking is more than covering my spending needs, going forward should I increase the deposit allocation to the savings account, or keep the allocation at 50/50 and use the accumulation that builds up in checking to diversify into more active investments?

A: You are in a good situation - not all payroll services allow you to split direct deposit allocations. You are wise to take advantage of the opportunity. It also indicates that your finances are in good shape if 50 percent of your pay is more than covering your immediate needs. So now, you have the happy problem of figuring out what to do with the extra savings.

Building up checking vs. savings for investments

Given how low interest rates on savings accounts are these days, it probably does make sense to diversify into more active investments, such via online brokers. Especially since your cash flow seems strong enough for you to avoid having to dip into savings. The question then becomes whether it is better to use the checking account or the savings account as the springboard into those investments.

Advantages of growing savings accounts

The savings account might have a couple advantages over the checking account as a place to let savings accumulate prior to investment:

1. Savings rates are higher

As low as savings account rates are, they are probably higher than the rate you are earning in your checking account, if any.

2. There are fewer chances to overspend

Having the excess accumulate in your savings account would reduce the temptation for any new spending to creep into your habits by having extra money easily accessible in your checking account.

Other considerations for direct deposit

Two other points to keep in mind as you set all this up:

  • First of all, meet balance requirements to avoid checking account fees. Make sure you don't starve your checking account to the point where you incur fees by dropping below minimum balance requirements or overdrawing the account. Those fees could easily wipe out any interest you would earn by making extra allocations to savings.
  • Second, raise deferrals for retirement savings accordingly. If your employer has a 401(k) retirement savings or other voluntary contribution plan, you might want to consider raising your deferrals into that plan if possible. This would maintain the principle of making savings automatic, but would get some of those savings directly into more active investments while also taking advantage of the tax-deferral and possibly matching benefits of a retirement plan.

Again, it sounds like you are dealing from strength financially, and incorporating more long-term investments into your plan should only strengthen your position.

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Transferring a money market account to a CD: Will I pay taxes?

August 24, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: Are there any tax consequences if I transfer money out of a money market fund or a money market account and into a long term CD?

A: This should be no problem, assuming the money is in an ordinary taxable account. If it is in a tax-advantaged vehicle like an individual retirement account (IRA), make sure the certificate of deposit (CD) is also within the IRA, or rolled into another IRA.

Interest held in a money market account is taxable in the year in which it is earned. So if you close the account, just remember that you will have to include any interest earned so far this year on your 2016 tax return.

As you contemplate the switch from a money market account to a CD, take some time to think about how to make this move fit with your eventual financial goals for the money.

How to evaluate financial needs and tax status for CDs

The first thing to think about is whether you are saving this money for some particular upcoming need, or generally for retirement. If there is a specific need on the horizon, that will help determine what length your CD should be, whether a long term CD or a short term CD.

If you are shifting this money into a long term CD because you are saving for retirement, you might consider shifting it into a Roth IRA. Assuming this is currently a taxable account, putting the money in a Roth IRA won't provide any tax advantage in terms of the principal you deposit. However, it will allow the account to earn interest tax-free until you withdraw money from it. Be advised, though, that there are income restrictions and contributions limits that determine whether and how much you can contribute to a Roth IRA.

What to look for in a CD

Whether or not you move the money into an IRA, identifying the purpose of this money will help guide your search for the right CD.

Here are four things to consider as you make that search:

1. Length

If you have an upcoming need for the money, that may determine the length your CD should be. Otherwise, since CD rates are generally higher on longer deposits, longer is better unless you think a rise in interest rates is imminent.

2. Laddering opportunities

If you have a series of different needs or want to hedge against interest rate changes, you might want to consider a CD ladder, which is a sequence of CDs with different maturity dates.

3. High Yield

Once you have decided on CD length, shop around to find the highest yield being offered at that length.

4. Low early withdrawal penalty

CDs carry a penalty for withdrawals made before the maturity date, but the penalties vary. Assuming the yield is competitive, look for a CD with a relatively low penalty because that will give you some flexibility if there is a significant move in interest rates.

Finally, in a few years when the maturity date of this CD is approaching, you should consider these issues anew with respect to your next CD, rather than letting the existing one roll over automatically at the same length and the same bank.

Got a financial 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 or send an email to Ask@MoneyRates.com.

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Will I owe taxes on an inherited certificate of deposit (CD)?

July 21, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: Our mother recently passed away. She had some CDs [certificates of deposit] that our names were on that are part of our inheritance. Will we owe taxes on that money?

A: First of all, sorry for your loss. One of the challenges of dealing with estate issues is that they can bring up complicated and unfamiliar issues at a time when one is least prepared to deal with them.

In terms of your question, the specifics of any tax situation usually require individual attention from a qualified tax expert in order to definitively answer any questions. However, there are some general principles that might give you an idea of what to expect.

The three concepts you should focus on when determining if there is a potential tax liability here are possession, size and timing:

Possession: Who are the primary owners of the CD account?

You mention that your names were on the CDs prior to your mother's death, so it is important to understand whether you were already considered the primary owners of those accounts, or just had joint privileges. What you are really trying to get at here is to make sure that you did not already have responsibility for paying taxes on the interest earnings of those CD accounts.

You may want to check your mother's past tax returns to determine whether your mother had been paying taxes on the CD interest in prior years. If so, and she was still the primary owner of these accounts, then the past interest is not a concern but your primary focus should turn to estate tax. This is where size becomes a key issue.

Size: What is the amount when you have to worry about federal estate tax?

Besides the issue of taxes on the CD interest, there is the potential for estate taxes to be due on the total amount left to you and the other heirs.

While estates can be subject to taxes, there is a fairly sizable exclusion amount that results in most estates not having any tax liability.

For 2016, the federal estate tax exclusion is $5,450,000. So, if your mother's estate was fewer than this amount, you should not have any federal estate tax to worry about.

Timing: When was possession of the CD passed down?

If the CD term was still continuing when possession of the CDs passed to you and the other heirs, you will be subject to income tax on any interest earned from that point forward. Coordinate with the bank to make sure that their tax forms accurately reflect the timing of when possession formally passed to you.

Again, consult a tax adviser to see how these concepts of possession, size and timing apply to your situation. Also, please note that these concepts apply to federal taxes, so you should check to see if there are any state tax implications where you live.

Finally, when inheriting a CD, it is wise to check the maturity date so you can decide about rolling over into savings accounts, new CDs or other investments. For example, don't automatically roll the CD over at your mother's old bank because you might find better CD rates elsewhere.

Comment: Have you considered rolling over inherited CDs into other investments?

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Which retirement investments can supplement Social Security income?

July 5, 2016

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I am 60 years old, and plan to retire at age 62. Because Social Security won't be enough to live on, I am continuing to put money into a 401(k) for extra income. Can you recommend an investment product for me?

A: Naturally, you should start with income-producing products, since you are looking for something to supplement the annual income you will get from Social Security. As you start to look into the possibilities more closely, what you find should indicate whether you can afford a more diversified approach than one devoted to income production - and this process might even affect your retirement plans.

Retirement income and inflation

Low-risk investment options

Every 401(k) retirement savings plan offers a menu of investment options that represents a range of risk levels, and you should be focusing on the portion of your plan's menu dedicated to income-producing vehicles. Some of these are likely to be stable-value vehicles. Though as with savings accounts and other conservative investments these days, the main drawback of stable-value options is an extremely low income yield.

Bonds for a higher source of income

A higher-yielding source of income should be bonds. Your 401(k) likely has long-term bond options, and these should be offering a higher income yield than the stable value options. Just be advised that both the price and the yield of bond funds are variable, so you will be subject to market fluctuations. You can mitigate this risk somewhat over the long-term by choosing a fund dedicated to high-quality bonds only.

If you find a bond fund that produces enough income to meet your projected needs, you might consider putting any excess 401(k) balance into a stock fund, to give you some element of inflation protection. Retirement is likely to be just the beginning of a long period in which you will be living off your investments. This means some inflation protection for the long run would not be out of place, if you can afford it after you have taken care of your income needs.

Use time to your advantage for retirement savings

Choosing an investment vehicle could be an instructive exercise, not just for the present but for the future. Looking at how much income current yields would provide will allow you to gauge the extent to which your current 401(k) balance is sufficient to meet your income needs.

Why delay retirement to boost retirement income

If it is not sufficient, you might want to consider delaying retirement long enough to build more savings and increase your Social Security benefit. That may not be what you want to hear, but if you you don't feel physically or mentally ready to continue working past the age of 62, at least consider downshifting to part-time work. Even that may be sufficient to buy you enough time to improve your retirement income.

In summary, income investments should be a central part of the answer if you are looking to supplement Social Security income. Just how much of your 401(k) should be devoted to income investments, and how soon you should access it, depend on the extent to which your income needs would be met by current yields.

Comment: How do you plan to supplement your Social Security income?

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