Personal Finance Blog By MoneyRates - May 2009

The tax rules of the IRS are complicated. That's why it is important that if you know a friend or relative who is at least 70 years old and owns an IRA, that you make sure they understand the IRS has waived mandatory distributions for IRA accounts for this calendar year. For a long time the IRS rule has been that if you are the owner of a traditional IRA, you must start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70��. Every year a different formula determines your mandatory minimum distribution. All distributions are then taxed as income. On December 23, 2008 the President signed into law that for 2009 these mandatory minimum distributions can be waived. The exception would be that if you turned 70�� in 2008, you were still required to take your mandatory distributions by April 1st of this year.

Why did the IRS give seniors this big tax break? Probably the first reason was the unfairness of making seniors sell stocks or mutual funds at a large loss to raise the cash for their distributions and then also tax them. That would be a real double whammy. A second reason was also the political capital that politicans get when they cater to the 85 million people who are senior citizens. Politicians may appear to have the altruistic interests of the seniors at heart, but don't forget many Wall Street lobbyists and donors were happy with the waiver as well. Selling is never good for Wall Street.

If you know somebody over 70 years of age who is still taking these distributions, be discrete, but ask them if they know about the waiver. Maybe they need the distributions to pay their living expenses. After all, this would not be uncommon. But, maybe they don't need to be taking the distributions and they can save money in taxes for 2009. As always seeking the advice of a financial consultants is advisable.

Remarkably, CD rates got even lower last week. What's more, the gap between 1-month and 6-month CD rates is starting to contract. There is, however, one remaining way to get a decent CD rate, and that's by smart shopping.

Let's start with CD rates overall. On average, based on figures from the Federal Reserve, both 1-month and 6-month CD rates are in record low territory. 1-month CDs are now paying an annualized interest rate of 0.28%. Even with low inflation, it's hard to imagine much demand for such a negligible rate of interest.

Meanwhile, 6-month CD rates fell to 1.07%. Not only is this a move lower on an absolute basis, but the gap between 1-month and 6-month CD rates is narrowing. It was a full percentage point a few weeks ago, but now is down to 79 basis points. This is still higher than the historical average, but the advantage of simply moving out to a longer CD is dwindling.

At the same time though, MoneyRates' research found several 6-month CD rates over 2%, including some at 2.5% or higher. This demonstrates that being selective may never have been more important than ever -- you can more than double your CD rate just by smart shopping. That's an unusual state of affairs -- and too good an opportunity to pass up.

The whole idea of a stress test on a financial institution seems prudent. Doubly-so when that institution is receiving taxpayer money. The stress test is supposed to tell us if a bank is prepared for disaster. We found out recently that some banks passed and some banks failed when put under the microscope. We are supposed to now feel better knowing that our taxpayer money will hopefully not end up as good money chasing bad money. Taxpayers may even get paid back I hear.

This sounds great, but leads to a new question: How come the simple principle of a stress test does not apply to mortgage lending? We know that in the past, qualifying was very easy. No money down? No Problem. No verifiable income? No problem. 110% debt-to-equity? Sounds about right.

The lenders have become more strict, but I am not sure they are issuing any true stress tests on their applicants. What if the husband loses his job? What if the real estate market dips another 15%? What if the borrower cannot make the balloon payment? Are these the questions lenders are asking? And if not, should they be?

Bad lending hurts everyone. We are all sharing the cost of all the bad loan mortgage write-offs through higher national debt and deficits. Lenders have responded with tighter standards. But, good lending may be a step beyond just looking at FICO scores and debt-to-equity ratios. It may be time for lenders to look at their prospective borrowers and give them the stress test. If they make loans that can survive the unpredictability of life, then they may have helped the whole nation out.

Short-term CD rates remained calm last week, but action on the long end of the U.S. Treasury yield curve suggested that changes may be ahead for CDs and other bank rates.

Like their CD counterparts, short-term Treasury yields were roughly unchanged last week, but yields of one year or longer Treasuries all rose. 30-year rates experienced the biggest change, rising by 22 basis points.

What's significant are the fundamental reasons behind this. For one thing, a disappointing auction of long-term Treasuries showed that there are limits, after all, to the appetites of investors for buying U.S. debt. This can limit future Treasury and Federal Reserve actions to keep interest rates down.

At the same time, oil prices have been rising, reminding the markets of how difficult it is to sustain a zero inflation environment. At the pump, gasoline prices rose 16 cents in just one week.

Speaking of gas prices, experience with buying gas can teach you something about CD rates. We all know that when prices rise or fall dramatically, prices at different stations can be all over the map, as different sellers react to market changes at different speeds.

So it is with CD rates, as well as for savings account and money market rates. As we move into a phase of renewed rate volatility, shopping around for bank rates will make more of a difference than ever.

Everybody knows the United States is a debtor nation. We owe literally trillions of dollars on money we have borrowed and spent. As a nation, we have even borrowed against our social security trust fund through an accounting trick. Is it any surprise that the citizens of this debtor nation face their own issues with credit card debt? I would say, no.

One of the solutions many Americans have utilized is the credit card balance switching act. Taking advantage of the many 0% intro-APR credit card offers, a cardholder can avoid paying monthly interest. Sites like Cardratings.com make it easy to find the latest credit card deals and go from offer to offer. The 0% rate is great, but these deals do come with risk and fees. The credit card companies charge a 3% balance transfer fee and the APR on normal card purchases is typically very high. Most companies make you pay off the higher-rate balance first. You also run the risk of being in a worse off financial situation down the road when the introductory period expires. What if you can't find a card to replace the 0% offer? Now your 0% monthly financing rate could be something like 15% or higher.

But, what if your only option to pay off a card balance is to dip into emergency savings? All the financial gurus are telling people to keep at least 6 months cash in a savings account. Do you keep that cash in the savings account or pay off the credit card balance? Tough question, with no easy answer. One solution might be to split the difference. Pay off half the balance and keep your emergency savings account open. The credit card balance switching act is easier to play with only half the balance. As for the savings account, use MoneyRates.com to keep finding the highest rates and do your best to replenish the account.