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Where to open an emergency-fund
account
Dear Dollar Diva,
We are 66 and 64. I have a 401(k) plan at work, Social Security
and retirement benefits, and I'm still working. We have accumulated
$130,000 in a money market account at the bank. We'd like to invest
it in something with a better rate, but it needs to be safe and
pretty liquid. What do you think?
Thompson
Dear Thompson,
Welcome to payback time! After many decades of working hard and
living below your means, you've finally accumulated more cash than
you know what to do with.
You're right: $130,000 is too much to be sitting in
a low-interest money market account. The Diva is happy to suggest
alternatives that will give you a better return and still provide
the safety and liquidity you need.
Presumably, the cash in your money market account
is to fund emergencies and big-ticket items, such as cars and expensive
trips. It should also be enough to provide a cushion so you won't
have to tap your equity funds in the future, when the market takes
its periodic dips and you're no longer bringing in a paycheck. To
make sure yours is offering the best rate, use Bankrate's money
market account search engine. But rest assured: You can do better.
FDIC insurance limit
An observation: The FDIC's insurance limit is $100,000 per account.
Your account has $130,000 in it; should your bank fail, you risk
losing $30, 000. The risk is low, but it's not worth taking. To
learn how to keep more than $100,000 in bank money market accounts
and have it all FDIC insured, read Greg McBride's "Jumbos
just aren't worth the risk right now."
Where to stash your cash
In spite of the low interest rates, a money market account or money
market mutual fund makes sense for cash you need instant access
to. However, for cash you're not going to need for six months or
more, here are some alternatives to consider:
- Certificates of deposit:
At this writing, 2.3 percent is the average interest rate on a
six-month CD; 4.6 percent on a five-year CD. Interest is taxable
in the year it's earned. Go to Bankrate.com's savings
page for up-to-the minute rates.
Laddering
is the investment strategy of choice for a certificate of deposit
portfolio. A portion of your cash is invested in shorter-term
CDs and a portion in longer-term CDs, giving you access to some
of your money short-term, without subjecting the entire portfolio
to the lower, short-term rates.
- U.S. Series I bonds:
I bonds are paying 4.4 percent through April 2002, and are indexed
for inflation; the rate is adjusted in May and November. Go to
the U.S. Treasury's Series
I savings bonds Web page for the current rate.
You won't pay state or local income tax on the interest
your bonds earn. For federal tax purposes, interest compounds
tax-deferred until the bonds are redeemed. But you will forfeit
three month's interest if you cash a bond before it's fifth birthday.
Each of you can buy up to $30,000
worth of I bonds per year. The Diva's "5
common questions about savings bonds" will tell you how
to buy them and how to redeem them.
- Pay down debt: Yields
on savings accounts are so low, it makes sense to use some of
your spare cash to pay off debt, if you have any: That includes
car and mortgage loans.
- Fund Roth IRAs: If
you like tax-free earnings, fund Roth IRAs for your spouse
and yourself.
You can withdraw your original contributions anytime, but you'll
get slapped with a penalty if you tap the earnings before five
years are up. The Roth IRA can provide a tax shelter for interest,
dividends and capital appreciation; why not use it?You have until
April 15, 2002, to make 2001 contributions of $2,000 each. For
2002, the contribution jumps to $3,500 for folks over 50. You
can make your 2002 contributions anytime between Jan. 1, 2002,
and April 15, 2003.
Unlike a traditional IRA, you don't have to take distributions
from your Roth IRA when you're 70 1/2 years old; it can grow tax-free
over your lifetime. You heirs won't have to pay income tax on
the earnings, either. The ability to fund a Roth IRA phases out
for joint filers with adjusted gross income between $150,000 and
$160,000. See IRS Publication
590, Individual Retirement Arrangements for more details.
Read the Diva's recent Money Makeover,
"Debtless
and happy" for more ideas on stashing your
cash and investing when you're lucky enough to have
more money than you know what to do with.
Editor's note: In April 2006, FDIC
deposit insurance coverage on retirement accounts
held at banking institutions was raised from $100,000
to $250,000. Non-retirement account FDIC deposit
insurance coverage remains at $100,000.
-- Posted: Jan. 24, 2002
 DOROTHY
ROSEN has a master's degree in finance, with a specialization in
accounting, from the Kellogg Graduate School at Northwestern University
in Evanston, Ill. Rosen has more than 15 years of experience in
the financial arena, serving in Illinois and Florida as a certified
public accountant, financial consultant, expert witness and educator.
She is owner of Dorothy Rosen, CPA, a public accounting firm that
serves individuals and small businesses.
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