Q: Can a small, not-for-profit homeowners association open a savings account? Can we obtain a 12-month CD?
A: Yes, your association should be able to have its own bank accounts, assuming it is a formally organized entity with its own tax ID number. Here are details on how to handle this:
- Clear ownership. Make sure that the account is opened in the organization's name and with the organization's tax ID number. That way, any earnings on savings accounts or CDs will get the tax treatment appropriate for the organization's not-for-profit status. This will also make sure that those earnings do not get reported to the IRS as belonging to you or any other individual.
- Authorized access. The organization should formally decide who should have access to the account, and make sure that only those persons are given authorization from the bank. This access should be limited -- it is good to have an emergency back-up, but the more day-to-day access can be handled by one person, the less room there is for misunderstandings.
- Accountability. Whoever is going to be responsible for administering your savings accounts or CDs should be asked to make regular reports to the group, perhaps every quarter. These reports can be short and sweet, but they just ensure that everyone is clear on the location of the money, what additions or withdrawals have been made, what fees have been incurred, and what interest has been earned. As much as anything, this is for the protection of the person overseeing the account, to make sure everyone is on the same page about how the money is being handled.
- Cash-flow management. You mention both savings accounts and CDs, and which you choose comes down to cash-flow management. If you will need to access the account several times a month, a checking account might actually be the most appropriate vehicle. If access is limited to a few times a year, a savings account will allow you to earn a little interest on that money. If you are confident that you won't need a portion of the money for a full year, then you can earn more interest by locking that amount up into a one-year CD. On average, one-year CDs are paying more than three times what savings accounts are these days.
- Finding competitive rates. Rates on savings accounts and CDs vary widely, so whatever type of account you decide on, make sure you do some comparison shopping before choosing a bank.
When handling money on behalf of any organization, think of that organization as a person who has trusted you with safekeeping his or her accounts. This should put you on the path toward doing the right thing with your responsibility for that money.
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