Looking for a money market account that is worth your time?

You may be tempted to compare today's money market rates with years past when ING, HSBC, and others were offering 5.00% APY.

However, there are two sides to every coin; when banks were paying 5.00% APY, inflation was also high. For 2007 the inflation rate was 4.3%. For most of 2008, inflation hovered around 4.0%.

Here is a chart of the inflation rate from 2007 to 2010 (every month the inflation rate is calculated as a percentage change from the same month a year prior):

Since, inflation is really just a measure of how much consumer prices increase, it determines how much you can buy with your money.

Instead of focusing on the savings/money market rates, you should take into account the current inflation rate and your highest marginal tax rate bracket.

Here is a simple example:
Sam is single and earns a $35,000 salary – for 2004 this puts him in the 25% tax bracket.

In April of 2009, Sam put $10,000 into an HSBC money market account which at the time was paying 1.65% APY.

At the end of the year, Sam reports the interest he earned to the IRS and pays taxes on it.

Let's see if Sam is keeping up with inflation after paying taxes:

12 months of interest earned: $165
Taxes: $165 x 25% = $41.25
Effective After Taxes APY: 1.24%
Inflation Rate for 12 Months ending in April 2010: 2.24%
Net Return: -1.00%

What if Sam didn't put his money in a money market account at all? His net return would have been equal to the inflation rate: -2.24% loss in buying power.

So how can you beat inflation and taxes?

Suppose Sam had put his $10,000 into a 5 Year Roth IRA DiscoverBank CD earning 3.00% APY.

12 months of interest earned: $300
Taxes: $0 Roth IRA withdrawals after age 59 1/2 are tax free
Effective After Taxes APY: 3.00%
Inflation Rate for 12 Months ending in April 2010: 2.24%
Net Return: 0.76% APY

Over the next year, you should be able to beat inflation with an IRA CD.

According to ForecastChart.com's forecast, US inflation for the next 12 months will be around 1.04%.

You can check DiscoverBank's current 5 Year CD Rates at RateCatcher.com.

Sources:
http://www.moneychimp.com/features/tax_brackets.htm
http://data.bls.gov/home.htm
http://forecastchart.com

Can you guide me to a bank that pays the highest interest? What I would like to do is put in a good lump sum and also be able to pay my bills through this account.

The best savings rates are always a moving target because banks change the rates they pay based on market conditions and their need for cash. That’s why I’d prefer to lead you to a good Web source for rates rather than a specific bank. The great thing about Web sources is that they regularly update their data and often provide links to the banks’ Web sites so you can open an account online.

My favorite rate-shopping site is BankRate.com. At the top of its home page is a series of tabs, each labeled with a different type of bank account or product. Clicking on the "Checking & Savings" tab brings up a chart that shows the national average rates for different types of checking and savings accounts. You can either click on the type of savings account you want — such as a checking or money-market account — or go to the bottom of that chart, where a link allows you to search for rates in your area.

You’ll get another prompt that asks whether you want the site to sort the information by interest rate, state or type of account, such as traditional checking or Internet-based checking. The rates you see may vary depending on how you sort the data.

For instance, a recent search showed that EverBank was offering an interest-bearing checking account with a 3.4 percent rate. But if you searched for money-market accounts that offer check-writing privileges, the same bank offers a 5 percent rate.

I should note that BankRate.com makes its money from advertising by banks seeking your business. But banks don’t have to buy an ad or pay a fee to be included in BankRate’s rankings, says Greg McBride, a BankRate Inc. analyst. Any bank that offers deposits in all 50 states and whose rates are available to new customers is included.

(Note: The Star-Telegram runs a list of checking, savings and CD rates at local banks and credit unions every Monday in Work & Money. The list is supplied by BankRate.com.)

I recently got my Equifax credit report and FICO score for the first time. My score is 757, which FICO says is "very good."

Under "Key Factors Affecting Your Score," the report mentions "the length of time your accounts have been established is relatively short." (Only time will improve that!) And: "The amount owed on your accounts is too high."

That last statement has me confused. I have two revolving accounts, which I pay off every month. I have never carried a balance. On my older account, which is about 3 1/2 years old, I have a credit limit of $500 and a typical current month’s balance of $46. On my other account, I have a limit of $22,000 and a current balance of $309. Together, my combined balance of $355 is only 1.6 percent of my combined credit limit of $22,500. How can a balance that uses up such a small part of my available credit possibly be considered "too high"?

Having made the effort to get as high a score as possible, it irks me that I am being penalized, if only by a few points, for supposedly having too high a balance.

The FICO model is always going to tell you something that you can do to improve your score, but when it resorts to saying your balance is high when you’re using just 1.6 percent of your outstanding credit, it’s "scraping the bottom of the barrel" for score-boosting advice, said Craig Watts, a spokesman for Fair Isaac Corp., which designed the FICO scoring model.

The biggest factor that affects your score is time, he added. You’ve obviously been extremely responsible with credit during the nearly four years you’ve been using it. If you keep it up, your score will naturally rise as you establish a longer credit history.

Once you hit a score of 750, you’re already getting nearly every lender’s best rates. Boosting your score above that level might be good for your pride, but it’s kind of like getting an A-plus-plus instead of an A-plus. That second plus doesn’t mean much.

Also realize that a credit score is a snapshot of one moment. You could get another score tomorrow, and it might be a bit higher or a bit lower, depending on your balances when the report was run.

Debit cards that allow clients to manage their money in an everyday account while earning the high interest rate of a money market fund are now available, with Sanlam launching this industry first.

Susan van Staden from Sanlam Personal Finance: Strategic Business Development said on Wednesday: "Throughout the world, debit cards are becoming the most convenient alternative to cash and cheques. However, traditional debit cards offered by banking institutions offer very low, if any, interest to clients.

"We believe that people want the liquidity of a money market account, the attractive interest rate offered by a money market account and the functionality of a bank account, and this is exactly what we’ve decided to give them."

Sanlam Liquid

The account, to be called Sanlam Liquid, therefore links with the Sanlam money market fund.

When clients open a Sanlam Liquid account, their deposits (including their salary, if they choose) are invested in the Sanlam money market fund to give them better returns than an ordinary bank deposit account.

Money market funds are protected by strict collective investment regulations, and fees are completely transparent on these accounts.

Van Staden said the Sanlam Liquid card offers clients a day-to-day account with total liquidity and access to their money via a Visa Electron debit card, as well as a full-fledged internet transactional capability for transfers and online payments, as well viewing account balances and statements.

Funds drawn abroad

The card can be used at any point of sale or ATMs where the Visa Electron sign or Saswitch signs are displayed. Funds can also be drawn at any ATM abroad and may be used at international POS terminals displaying the Visa Electron logo.

Since only banks may issue payment instruments and partake in settlements through the National Payment system in terms of current legislation, Rennies Bank acts as issuer of the debit card. This however does not affect the fact that the deposit is actually in the Sanlam money market fund

Well, here we are at the end of another RRSP season. The rush is on to get the contributions in, and the rush is on to figure out where to stuff it. I guess at this point if you haven’t made your contribution yet, the important thing to do is just to make sure it is in an RRSP account somewhere; we can always figure out in a later column what to invest in.

This week, I thought I would include a piece by Jamie Golembek, head of tax and estate planning for AIM Trimark Funds. I think you will find it to be of particular interest, especially at this time of year.

Resolution 1: MAXIMIZE RRSP CONTRIBUTIONS

The contribution limit for registered retirement savings plans for 2006 is the lesser of 18 per cent of 2005 earned income or $18,000. If you don’t have the cash, consider making an RRSP contribution “in-kind.”

Keep in mind, if you contribute a fund with an accrued loss “in-kind” to an RRSP from a non-registered account, that loss is permanently denied. A better strategy would be to switch the fund to a money market fund, realize the capital loss, and then contribute the money market fund to the RRSP.

Resolution 2: MAXIMIZE RRSP FOREIGN CONTENT

With the elimination of the foreign content limit, you now have the option of investing your entire RRSP or registered retirement income fund globally, without any artificial restrictions. Yet surprisingly, many investors are still hovering around the former 30 per cent foreign content limitation.

Resolution 3: SET UP A SPOUSAL RRSP

Spousal RRSPs remain one of the last legal methods of income-splitting between spouses or common-law partners. The primary benefit of a spousal plan is that funds withdrawn from it can be taxed in the hands of the annuitant rather than the contributor. If the annuitant spouse is in a lower tax bracket than the contributor spouse in the year of withdrawal, there may be an absolute and permanent tax savings.

Resolution 4: INVEST OUTSIDE AN RRSP

Investing in shares of multi-class mutual fund corporations (where each class of shares represents a different fund) has an advantage over investing in plain-vanilla mutual funds in that investors can switch from one class of shares to another without incurring any immediate capital gains tax. A secondary, but oft-forgotten benefit, is mutual corporations are generally able to minimize the amount of annual capital gains distributions by using capital losses of one class to offset capital gains otherwise distributable for other classes.

Resolution 5: OPEN UP RESPS FOR (GRAND) CHILDREN

It is nearly eight years since the federal government reinvigorated struggling Registered Education Savings Plans by introducing the Canada Education Savings Grant (CESG) program, which provides a 20 per cent grant on the first $2,000 a year of annual RESP contributions for each beneficiary. Higher grants may apply to low- and middle-income families.

Keep in mind if you have not set up RESPs for children or grandchildren, there is a huge opportunity to go back and collect prior years’ CESGs, cumulatively retroactive to 1998.

Resolution 6: MAKE YOUR INTEREST TAX DEDUCTIBLE

Still carrying a mortgage but also investing outside your RRSP? Under a strategy approved several years ago by the Supreme Court of Canada, you can sell non-registered investments (subject to any capital gain/loss considerations), pay off the mortgage (again, subject to any early payment penalties) and then get a secured line of credit against your home to repurchase the securities sold. This way, your otherwise non-deductible interest becomes tax deductible.

Resolution 7: CONSIDER INCOME SPLITTING

The Canada Revenue Agency announced that the prescribed interest rate for the first quarter of 2006 will remain at 3 per cent. A spousal loan income-splitting strategy whereby the higher income spouse (or partner) loans funds to the lower income spouse to invest may be ideal given the near-record-low prescribed rate required to be charged on such loans.

Resolution 8: CONSIDER A SYSTEMATIC WITHDRAWAL PLAN

Looking for tax-effective cash flow from your mutual fund account? Consider setting up a systematic withdrawal plan which allows you to receive regular, tax-efficient cash flow from your funds. Most fund companies offer this type of plan.

Resolution 9: DONATE “IN-KIND” TO CHARITY

Consider donating appreciated stock or mutual funds directly to charities in 2007. Not only will you get a tax receipt for the fair market value of the stock or funds donated, but you also will be able to reduce your capital gains inclusion rate to 25 per cent from the usual 50 per cent.

Resolution 10: PLAN NOW NOT TO GET A TAX REFUND

Finally, if you regularly get a significant tax refund each spring, perhaps due to RRSP contributions made during the year, you should consider applying to the CRA for a reduction of tax withheld at source by your employer. Because CRA’s Form T1213 needs to be completed each year, January or February is an ideal time to begin the process anew.

Before you invest in any online savings or money market account, check the current rate being offered by AmTrust Bank on their e-Money Market Account. AmTrust Direct just raised the rate from 5.30% to an industry leading 5.36% APY.

"We want our customers, and potential customers, to know that this is not a so-called ‘teaser’ rate," says Matthew Lehman, Vice-President of Internet Marketing for AmTrust. "We don’t do any form of bait-and-switch. And it’s not only for new money. You’ll get an industry-leading rate on all your money." He adds, "AmTrust Direct has always been known for top-of-the-market rates."

AmTrust is a division of Ohio Savings Bank, founded in 1889 and one of the fastest growing financial institutions in America. The Bank has grown from a local savings and loan with one office to a nationally recognized leader in retail banking with branch offices in Florida, Ohio and Arizona. The Bank is among the top 20 mortgage loan originators in the country, and also specializes in commercial construction lending.

AmTrust Direct has always paid among the top rates in the country, and since launching their e-Money Market Account in August 2006, the account has consistently paid a rate in excess of 5.15% APY. Their e-Money Market account requires just $1,000 to open, with no minimum balance fees, and all the customer’s money earns the same high rate.

"We try to make it easy for our customers," states Lehman. "Our CDs automatically roll over to the highest rate for that term, so our customers never have to worry about where their money is going to work the hardest for them. They can relax, do nothing and still enjoy one of the highest rates in the country."

User " I sold my house and am walking away with $31,000 profit. I am planning on buying a new house, but not until May. How do I make the most on my return over these few short months — stocks, money market, short-term CD? –Making the most of it Match the life of the investment with the planning horizon. "

If you expect to need the money in May, don’t invest in stocks. Invest instead in a money market mutual fund, money market account or short-term CD.

You shouldn’t be looking to hit a home run with a three-month investment, so don’t swing for the fences by buying stocks.

Depending on your tax bracket and your state of residence, it may make more sense to invest in a tax-exempt municipal money market fund than a taxable money market account or CD.

You can compare all of these investments with a calculator on Bankrate.com. This calculator will estimate your tax equivalent yield on a tax-free investment so you can compare your choices, but you have to know your state laws on tax exemption and the structure of the tax-exempt investment.

If you don’t expect that you’ll need to put all of this money into the new house, then you can consider other investment alternatives for the balance.

Funding an IRA account, for example, might make sense for part of the money. Still, it makes sense to wait and see how much of the money you’ll need before committing any part of the funds to longer term investments.

– Don Taylor/ Bankrate.com

reported by Dr. Don of BankRate.com

Dear Dr. Don,
I sold my house and am walking away with $31,000 profit on Tuesday. I am planning on buying a house, but not until May. How do I make the most on my return over these few short months — stocks, money market, short-term CD? I’m confused.
– Jon Jumble

Dear Jon,
Match the life of the investment with the planning horizon. If you expect to need the money in May, don’t invest in stocks. Invest instead in a money market mutual fund, money market account or short-term CD.

You shouldn’t be looking to hit a home run with a three-month investment, so don’t swing for the fences by buying stocks.  Depending on your tax bracket and your state of residence, it may make more sense to invest in a tax-exempt municipal money market fund than a taxable money market account or CD. You can compare all of these investments on Bankrate.

This CCH calculator will estimate your tax equivalent yield on a tax-free investment so you can compare your choices, but you have to know your state laws on tax exemption and the structure of the tax-exempt investment.

If you don’t expect that you’ll need to put all of this money into the new house, then you can consider other investment alternatives for the balance. Funding an IRA account, for example, might make sense for part of the money. Still, it makes sense to wait and see how much of the money you’ll need before committing any part of the funds to longer term investments

The Wall Street Journal
Cash is regaining some of its sparkle.

With the Federal Reserve leaving short-term rates unchanged last week, many financial planners are recommending that clients put their extra money into short-term securities and high-yielding savings accounts to boost their returns.

That’s a shift from last fall, when money managers were moving into longer-term investments to lock in still-favorable yields. Banks, too, are beginning to change course. After trimming yields on cash accounts last fall, some banks are bumping up rates again to lure deposits.

Early last week, for example, HSBC Direct, boosted the promotional rate on its online savings account to 6 percent on new deposits until the end of April, from 5.05 percent.

Mark Rosenberg of Beverly Hills, Calif., prefers high-interest money-market accounts to certificates of deposit because the difference in yields between the two has been ”very, very negligible.” ”And if interest rates go up, my money-market accounts also go up,” says the 48-year-old real-estate broker and lawyer.

Another advantage of moving to more-liquid investments: Doing so can give you the flexibility to quickly move into higher-yielding securities if and when interest rates start to move higher.

A raft of stronger-than-expected economic data and shifting rate expectations are spurring the move toward cash. Oil and gas prices have retreated, easing concerns over a slowdown in consumer spending. Sales of new homes increased in December for a second consecutive month, raising hopes that the worst of the housing downturn could be coming to an end. Meanwhile, the unemployment rate is still relatively low, and the manufacturing sector is proving to be healthier than expected.

Sales fever has hit the high street over the last week but as well as bargains on clothes and electronics, the new year can also be a good time to grab decent deals on your finances.

A number of banks and building societies have launched new rates on savings accounts, credit cards and mortgages. But these rarely come free of pitfalls, so it is worth paying attention to the small print.

Barclays tops the polls for one of the best interest rates on a savings account with its new regular saver paying out 12.5 per cent gross. The rate has been increased by 25 per cent from the start of this month until the end of February. It is fixed for 12 months and applies exclusively to regular deposits of between £25 and £250 per month.

If you pay in the maximum monthly contribution of £250, you would receive £203.94 gross at the end of the year term, or £163.15 if you are a basic rate taxpayer and £122.36 for higher rate taxpayers. If you paid in £150 monthly, you would receive around £122 in gross interest.

To qualify for this account, you must already have a Barclays current account that you pay at least £1,000 into each month. Another downside is that you cannot make any withdrawals during the year. If you withdraw money or miss a payment you will lose the 12.5 per cent rate for the entire year, and instead receive the less attractive Barclays Easy Saver account rate of just 3.46 per cent.

The options include index and actively managed funds, but the actively managed funds are not individual funds. They are portfolios of funds that contain so many funds — up to 19 in some cases — that they could end up performing a lot like index funds. Or worse when you take into account their higher fees.

For better or worse, many of Fidelity’s best-known funds — Magellan, Contrafund, Low-Priced Stock, Diversified International — are not in the plan. It does contain some fine actively managed funds, but you won’t be able to buy them individually.

The index funds will cost investors 0.5 percent a year, or $50 on a $10,000 investment. That’s lower than the old TIAA-CREF funds and lower than most index funds offered by rival 529 plans.

The actively managed funds (excluding the money market fund) will cost 0.87 to 1.09 percent a year. That’s higher than the old TIAA-CREF funds.

A fund’s performance is calculated after these fees have been deducted. But the fees are worth knowing because over a long period they can affect performance.

The new Fidelity options fall into three categories:

– Two age-based options: These portfolios start off aggressive (invested mostly in stocks) and gradually become more conservative (moving more into bonds and money market funds) as the child gets closer to college age.

One age-based option invests in a group of index funds, the other invests in a collection of actively managed funds.

– Six static options. Fidelity offers three portfolios that do not change over time. One remains 100 percent in stocks, one remains 70 percent in stocks and 30 percent bonds and the third remains 100 percent in bonds and other fixed-income investments.

Each static option comes in an indexed-version and an actively managed variety, for a total of six static options.

– Individual funds. Fidelity offers six individual funds: the Spartan 500 index fund, a total market index fund, an international-stock index fund, an intermediate-term Treasury bond fund and a stock fund with social criteria.