MoneyRates Blog

Q: Can I move an IRA certificate of deposit into my mutual fund IRA without penalty?

A: Funds in IRAs can be invested in anything from money market accounts to stocks or commodities. You have flexibility about how you fund your IRA–as well as the freedom to move an IRA from one investment vehicle to another without penalty.

However, you must take care to move your money in the right way.

As you probably know, transferring money out of an IRA is a taxable event, and if you are below the age of 59 1/2, there would likely be an additional penalty as well. So, whenever you move money from one IRA account to another, caution must be taken to make sure it doesn’t appear to be a distribution.

First of all, it is important that the transfer is between IRAs of the same type. For example, transferring funds from a traditional IRA to a Roth IRA is usually a taxable event, though the early distribution penalty would not apply. However, you can transfer from one traditional IRA to another without a taxable event or penalty.

This type of transfer is known as a “trustee-to-trustee” IRA transfer. It means that the money is going from one IRA trustee to another, and thus is not being distributed outside the IRA. Find out from both the bank holding your CD and the mutual fund company with your IRA account how they handle such transfers, and make sure you instruct both parties in writing that this is to be a trustee-to-trustee IRA transfer.

Finally, the above assumes your certificate of deposit has run its term, since early withdrawal could trigger another kind of penalty. If you are seeing a CD from a few years ago mature, it’s understandable that you’d be looking for greener pastures–even today’s best CD rates are nowhere near where rates were just a few years ago.

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

Ask anyone from an esteemed economist to a casual observer, and they will probably agree that excessive debt was a big reason behind the economic collapse in 2008. In that context, it seems ironic that the Federal Reserve has been intent on reviving the economy by stimulating more borrowing — and perhaps it’s less surprising that this strategy has failed.

Instead, US consumers might have a better idea. By rebuilding their savings rates, they may be laying the foundation for a stronger economic recovery.

Savings rates are on the mend

There is ample evidence that savings rates are on the rise. The Bureau of Economic Analysis reported a rise in the Personal Saving Rate in the second quarter of 2010, and this measure of saving as a percentage of income has been above 5% since the fourth quarter of 2008.

The Household Debt Service Ratio reported by the Federal Reserve, which is a measure of the burden represented by regular debt payments, has fallen sharply since the recession began. This has begun to counteract the effects of a 15-year debt binge that began in the early 1990s.

Higher savings rates today may build a stronger recovery tomorrow

All this fiscal responsibility on the household front has thwarted the Federal Reserve’s strategy of stimulating borrowing by lowering interest rates. The FDIC reported weak borrowing demand in the second quarter of 2010, though banks were still able to turn a healthy profit in the quarter.

If debt burdens had been low — or even moderate — going into this recession, then stimulating lending would have been a viable quick fix for the economy. As it happens, debt service ratios were at an all-time high, so scaling back on borrowing is a necessary process to reposition households for future spending. Repairing savings rates might not be a quick fix, but it does lay a stronger foundation for the eventual reovery.

Despite all the advice from personal finance experts to choose inexpensive ways to cover accidental checking account overdrafts, a lot of folks are apparently willing to pay 25 to 35 bucks a pop to ensure their debit card transactions go through when their balances are zero.

Almost half of bank customers, 46 percent, said they will, or already did, opt in for their bank’s overdraft program and were willing to pay the attached fees, according to a new survey for the American Bankers Association, which not surprisingly is in “I-told-you-so mode.”

“These results show that many bank customers value debit card overdraft protection and are willing to pay for the service,” ABA Vice President Nessa Feddis said a press statement. “They are now in the driver’s seat and control the way their accounts are managed.”

New checking account debit card overdraft rules in effect now

The survey, conducted by an independent market research firm, polled more than 1,000 adults by phone Aug. 14 and 15, on the eve and day new federal regulations went into effect requiring banks to get permission from customers before paying debit card overdrafts and charging a fee for the service. An earlier phase of the rules went into effect in July requiring them to get permission from new accountholders.

Previously, banks enrolled customers in the service automatically and charged fees each time they overdrew their accounts with their debit cards. Some customers racked up several charges a day without realizing their accounts were overdrawn. New rules were written after Congress passed a law requiring banks to get permission to enroll customers in such programs. A survey by Consumer Federation of America earlier this year reported the average overdraft fee at big banks was $35.

Other, less-expensive ways to cover overdrafts include linking a checking account to a savings account for protection or linking a checking account to a line of credit.

Q: When can we expect the Federal Reserve to start raising bank deposit rates?

A: It’s important to start by noting that the Federal Reserve does not directly control the rates that banks offer depositors, but its policies certainly have an influence on those rates. For well over a year now, those policies have been to drive interest rates as low as possible.

To get a feel for when the Fed might reverse its low interest rate policies, you should start by thinking about why the Fed implemented these policies in the first place. In large part, it has been an effort to stimulate the economy. The thought is that if you make interest rates lower, people will borrow more, and the resulting spending will jump-start the economy.

This hasn’t worked out too well so far. Growth in the U.S. economy has slowed over each of the last two quarters. It seems that households now are more interested in paying down debts than accumulating new ones. Plus, banks aren’t particularly keen on lending since many are still sorting out their bad loans from the housing boom.

Rather than deterring the Federal Reserve from its low interest rate policies, the lackluster recovery seems to have reinforced the Fed’s commitment to them. So, in answer to your question, low interest rates will probably be with us until either:

• The economy shows signs of sustainable growth.
• Inflation starts to perk up. This would be a bad way to have rates rise, since low growth and inflation are a nasty combination.

In the meantime, then, your only option for raising your deposit rates is to shop around for the best CD rates, money market rates and rates on savings accounts.

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

There’s been a shortage of happy economic news lately, so a report on auto loans came as a welcome surprise. According to a study by credit reporting bureau TransUnion and reported by the Associated Press, the percentage of auto loans that were late by 60 days or more dropped to 0.53 percent from 0.73 percent a year earlier.

What’s so great about that? It shows consumers are getting better control of their debts.

Auto loan data indicate strengthening household finances

The drop in delinquencies on auto loans is just one indication that consumers are improving their financial conditions. Lower delinquency rates on auto loans is part and parcel with a trend that has been emerging of late. Credit card balances are down. Household debt service ratios are down. People are getting out from under the mountain of debt that has been built up over the past decade.

This emerging pattern shows that we’re not in for a quick fix. The Federal Reserve’s actions–lowering interest rates to stimulate more borrowing–is a quick fix for the economy, but it’s also a dead end. The last economic recovery was essentially built on increased borrowing, and look how that turned out.

A more solvent consumer would be the basis for a more sustainable recovery. It’s a slower cure, but in the long run, stable households carrying less debt may best for what ails the U.S. economy.

The auto loans news is an indication that help is on the way, eventually. A stronger economy would mean more demand for loans, and it would also mean that the Fed could stop artificially driving market interest rates downward. Both would mean better money market rates, CD rates and savings account rates.