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Are Checking Account Promotions Worth Checking Out?

You’ve probably seen banks advertising various promotions for opening a checking account and wondered if it was worth it? Depending upon the type of promotion offered and the strings attached some of these promotions are definitely worth a look.

Generally, checking account promotions involve some sort of giveaway: cash, points, airline miles or electronics such as iPods. Most banks restrict bonuses to new customers, who then have to meet specific requirements to claim the loot. Among the restrictions could be maintaining a minimum daily balance, making a certain number of withdrawals with an ATM card or setting up recurring direct deposit of your paycheck.

You also may encounter promotional interest rates that last for a period of time. The fine print of such offers generally indicate that rates are variable and may be subject to change. If you’re looking for this type of deal, try to find checking accounts that tell you how long the promotional rate will last. Always find out what the rate will be after the promotional period ends and what type of monthly fees are involved.

Some banks also offer promotions for people who hold more than one account with them. Do your homework to find the right products and services for your needs instead of rushing into something just for a free iPod.

Do I Have To Pay Taxes on Interest from CDs, Savings, Checking Accounts?

One common question regarding deposit accounts and interest rates is whether or not you have to pay taxes on interest from CDs, savings, and checking accounts. The short answer is yes. If you earn interest on a deposit account, you normally have to pay taxes. However, it helps to know a little more about the policies surrounding taxes and deposit account interest income.

When you file your taxes, the IRS expects you to report all your income, no matter how small. This includes income from any side businesses that you may have, as well as income from interest and from dividends. It is important to note that you are supposed to report income even if you don’t receive a 1099. Just because you didn’t get a copy of a 1099 doesn’t mean that the IRS didn’t receive one. On top of that, if the IRS decides to take a closer look at your tax return paperwork, an agent might find a bank account that shows that you earned more than you reported. You would have to pay a penalty, interest and, of course, the amount that you owe. This can get expensive. Plus, if the agent suspects outright tax fraud rather than an innocent mistake, it can get even uglier – and more expensive. Your interest income will be taxed at your marginal tax rate. This is the rate of the highest tax bracket you fall into. (Your entire income is not taxed at the same rate. Each level of income is taxed at the bracket it falls into. A portion of your income is taxed at 10%, a portion at 15%, a portion at 25% and so on, up to the highest tax bracket you are in.) Your interest earnings will be added to your earned income and other income as you figure your adjusted gross income.

You will need to report the interest earnings from your savings accounts. This also includes reporting interest earnings from money market accounts and from interest bearing checking accounts. Most of the time, you can find information about the interest you earned on the 1099-INT that your financial institution should send you. You can also ask your bank for this information, or look at your bank statement for the last month of the year for information on interest that you have earned for the year. If you are a member of a credit union, any dividends you receive as a member will be counted as bank interest.

When reporting income from interest, you can do so on the front side of your Form 1040A, or on your Form 1040EZ if you have earned less than $1,500 in interest. If your interest earnings amount to more than $1,500, you will have to file a Schedule B along with your tax return. If you end up having to file a Schedule B, it will make you ineligible to file a Form 1040EZ. If you also earn money from dividends, exceeding the amount of $1,500, you are probably familiar with Schedule B, since you use it for both dividends and for interest earnings. It is worth noting, though, that your earnings are clearly separated by category. You do not add your dividends and your interest income together to determine whether or not to file a Schedule B. If you earn $1,300 in interest income, and $1,000 in dividends, you will not have to file a Schedule B. You only have to file the Schedule B when one of the totals reaches $1,500

One of the most important things to remember is that you owe taxes on interest income earned on a CD. This is true in most cases – even if you did not receive a check for the interest. You will probably receive a 1099-INT detailing the interest your CD account earned for the year, and you are generally expected to pay taxes on the income for the year that you earned it. So, even if the bank didn’t sent you a check for the interest (some just add it to the CD), you still have to pay income taxes on the interest.

The main exception (and there are others) to paying income tax on your CD interest earnings is the IRA CD. Because a traditional IRA is a tax-deferred account, you do not usually have to pay taxes until you actually withdraw money from your CD account. This is one of the reasons that some prefer to open an IRA CD, instead of other CD products. Your interest earnings from a CD may be offset by penalties that you pay for early withdrawal. As you know, taking money from your CD account before it expires will result in a penalty. This penalty can provide you with a tax break. Basically, you end up subtracting the amount of the penalty from the amount of interest that you earned to get your effective interest income from the CD. You would report your CD penalties on your tax form, and it would offset some of the earnings from interest that you report.

The IRS expects that you will report your interest earnings. In most cases, you are likely to receive a 1099-INT describing your interest income. Even if you don’t receive this paperwork, though, you should still report your earnings. If you have a question about your taxes, and what should be reported on them, it is a good idea to consult a tax professional who can help you make sure you aren’t breaking any rules.

Should I Switch to an Internet/Online Bank?

As more and more banks are opening online branches, often with better CD rates, savings rates, and checking rates, and lower fees. It might be time to ask yourself whether it makes sense to switch partially or completely over to an online bank.

What are the Advantages of an Internet Only Online Bank?

Typically, online banks have better deposit rates across the board. How are online banks able to offer this? Because they cut out all the overhead costs with maintaining a brick and mortar bank. You should look for a bank with no minimum balances and no fees. Many online banks will refund you a portion of ATM fees, and some like Ally Online Checking will refund all ATM fees.

You should look for an online bank that offers top quality telephone customer service. You should call their lines and see how long their hold times are, and how knowledgeable their agents are. Telephone support is crucial in an online bank because you can’t just go into a local branch and talk to someone in person.

Online banks typically offer free ACH transfers between accounts. So you can easily link an online account with a traditional bank. Make sure you read up on how many free transfers you have per month, as it can vary by bank.

Many online banks also have checking accounts that allow you to write checks online. Some also have physical checks that you can use. Most online checking accounts will offer you a debit card for you to use.

Another thing to look out for is the ability to set up free bill pays and auto pays. This is important if you use your bank to pay credit cards and various other bills. Many online banks have and offer these services for free.

What are the Disadvantages of an Internet Only Online Bank?

The disadvantage is pretty simple – you won’t be able to visit your bank and talk to someone.

In the end, make sure you do your research before choosing to switch to an online bank. Many times it might make sense for you to have accounts with both an online only and traditional bank. I’ve found that Ally Bank has some pretty good rates on their CDs and savings accounts. Their checking account also has all the features I listed above. In addition, I’ve found that their customer service has been very responsive and helpful.

Recent Changes in Credit Card Laws/Legislation/Rules

Interested in what the new credit card laws mean for you? Here’s a quick rundown of some of the changes we’ve seen in the recent credit card legislation changes and how it can benefit you:

  • Banks can’t raise interest rates on existing credit card balances unless a promotional rate ends, you’ve been late with a payment, or the card has a variable rate.
  • Interest on new balances can only be increased after 12 months if the promotional rate ends or payments are 60 days late.
  • You must have the right to “opt out” of major changes to your credit card terms. Opting out closes the account but you have five years to repay your debt at the current interest rate and terms.
  • Banks can only sign up people under 21 for credit cards if they have an adult co-signer or can prove they have enough income to pay bills.
  • You must receive your statement at least 21 days before payment is due.
  • Credit card statements must clearly show the date and time your payment is due. The time must be no earlier than 5 p.m. on the due date.
  • Statements must explain how long it would take to pay off your balance by making only the minimum payments.

Pay close attention to the fine print in credit card offers to become familiar with the terms and conditions. Also read your statements on existing accounts carefully to understand any changes; think twice before signing up for credit card offers, such as cash advances, related to existing accounts.

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Should I Open A Free Checking Account?

Many banks offer “free” checking accounts. Saving money on monthly maintenance fees is a good thing, but signing up for these accounts usually comes with some conditions. Some of the requirements you  may need to meet to qualify for “free checking” include:

  • Minimum balance requirements must be met to avoid monthly charges
  • Making too many withdrawals and transfers during a statement cycle could result in fees or maintenance charges
  • You may be required to set up regular direct deposits for fees to be waived
  • Most free checking accounts do not earn interest
  • If the account earns interest, rates may drop if you don’t meet the requirements for free checking
  • Some banks may require you to link a free checking account to one of their savings accounts

Shop around to compare free checking accounts from several banks. In addition to low or no minimum deposit requirements, banks will oftentimes offer a cash bonus for opening a free checking account. Some banks also offer merchandise such as cameras or gift cards for opening an account. Other incentives to open a free checking account include free checks and debit cards.

Make sure you take the time to read through all the terms for opening a new checking account to understand all the fees and rules.

Free checking isn’t always free – make sure you understand all the requirements before you open a free checking account.

Can Banks Take Money From Checking Account To Pay Loans?

Can a bank take money from your checking/savings account to pay off your loans?

An Atlanta couple were surprised to have their Wells Fargo checking account emptied by the bank in order to pay back a student loan. The bank deducted $4,059.82 from the checking account, which was originally a Wachovia account, to put toward  the $10,000 student loan, according to the Atlanta Journal Constitution.

Wells Fargo had called in the student loan even though the couple thought they had another six months before having to make payments. The student loan account had been turned over to collections.

Wells Fargo was able to take the money from the checking account because of what is called the right of setoff. This means that when people deposit money in banks, they are agreeing that the banks can borrow the money if they promise to repay it. If a person borrows a loan from a bank where they also have money on deposit in a checking or savings account, the bank can take that money and apply it to the loan balance. Banks usually avoid using the right of setoff unless they’ve run out of other options.

“We don’t do this without lots of attempts to communicate with our customers and try to work things out,” said Jay Lawrence, Atlanta spokesman for Wachovia. “When this happens, we don’t like to do this. We want our customers to succeed.”

Unfortunately, the process of removing money from the checking account resulted in the couple being hit with overdraft fees for purchase that would have cleared if the bank had not taken the money, and suffering other financial damage.

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5 Tax Season Pitfalls to Avoid

5 Tax Season “Gotchas” for the American Borrower to Beware

Gotcha #1: Watch out for Refund Anticipation Loans offered by tax preparers that promise filers immediate access to their projected refund, the effective interest rate can be 50% to as much as 500%

Gotcha #2: Don’t pay your taxes by credit card; it can add another 30% to your tax bill

Gotcha #3: File for an extension, there’s a failure-to-pay penalty of 5% per month – until it reaches 25% of the amount owed and a monthly rate after that

Gotcha #4: You can borrow money from the IRS at low rates and buy time to pay high-interest credit card debt while repaying the IRS

Gotcha #5: Do not increase your withholding. This “forced savings” sounds like a good idea, but you’re actually providing a cheap loan to the IRS

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What is a Health Savings Account (HSA)?

Medical expenses are a major concern for many of us today. With the rising cost of healthcare coverage, more and more employers are cutting costs by providing insurance plans with high deductibles or eliminating healthcare coverage altogether. Whether you are covered by your employer or you choose to purchase your own coverage, a high-deductible health plan will have you paying large out-of-pocket expenses in order to maintain a low premium.

These plans require you to pay for medical expenses until the deductible is reached, which could cost you thousands of dollars. However, there is a smart saving option to help you pay for these expenses, and save money at the same time: a Health Savings Account (HSA).

Using your HSA to pay for qualified medical expenses is easy. You are allowed an unlimited number of tax-free payments or withdrawals to pay for qualified, out-of-pocket medical expenses as they occur. Oftentimes the bank will give you a debit card for you to use on all your health related spending.

As the owner of your account, you are responsible to report HSA activity by completing and filing Form 8889 with your federal tax return. As a result, you must hold on to your qualified health care expense receipts to ensure accurate tax filings.

You may not always use every dollar you contribute to your HSA. So, you may wonder, what happens to that left-over money?

An HSA is not a “use it or lose it” account. Any unsed funds that are contributed to your account stay in your account. They don’t expire and disappear like a Flexible Spending Account (FSA). Unused funds rollover into the next calendar year and can accumulate in this way year after year. And, you can continue to make your maximum annual contribution regardless of the dollar amount that has rolled over or accumulated.

After age 65, unused funds can be used for any purpose – not just qualified health care expenses. Continue reading…

Should I Put Money In Savings Or CD?

Savings Account vs CD

You’re sitting on some cash and you’re wondering whether to put it in a CD or savings account. Given the current rate environment, there are some advantages and disadvantages to each option.

Should I put my money in a certificates of deposit?

Before you decide on a savings or CD, you’re going to want to ask yourself if you’re going to need the cash in the near future. Depositing your money into a CD will lock up your money for some time. Most CDs can be purchased in fixed terms such as 3 months, 6 months, 1 year, etc. Your money would be locked up for that time frame and in exchange you would get an interest rate typically higher than the savings rate, and that is guaranteed by the FDIC.

Most banks or brokerages will charge a penalty if you withdraw or cash out the CD prior to the end of the term. This will impact any interest earned as the fee would likely be greater than any interest earned. You need to make sure that you’re not going to need the money prior to the end of the term. Currently the highest CD rates are the long term CDs – anywhere from 2-10 year terms. These long term CDs have the best rates but you won’t be able to touch your money for the term of the CD, and if rates go up you will not be able to take advantage.

Should I put my money in a savings account?

Putting your money to work in a savings account can also generate a solid interest payment every month while maintaining liquidity with your money. In most times, you’ll get a rate that’s generally lower than a CD but without having to tie up your money. This would likely benefit those that want to earn a great interest savings rate but want to make sure to have immediate access to their cash.

You’re going to have to be careful because some banks do charge monthly fees and have account balance minimums that will impact interest earned. In addition, you’ll have easy access to your money which makes it harder to save if you don’t have self control.

In today’s rate environment, it makes the most sense to put your money in a high yield online savings account such as Ally Savings or WT Direct. Both of these online savings accounts provide high rates – Ally has no minimum balance while WT Direct has a $10,000 minimum balance. By using an online savings account, you can earn a decent interest rate while waiting for rates to improve.

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What is a Spousal IRA?

A spousal IRA allows contributions to be made to into an account on their spouses behalf. They were created to allow stay at home parents to put away money for retirement even if they don’t earn any income. Normally you’re allowed to contribute $5,000 or 100% of your income to your IRA. However if you’re a stay at home mom or dad you don’t have an income, which is where the spousal IRA comes into play. The working spouse may put away money into their spouse’s IRA.

You can setup a spousal roth IRA or a traditional IRA. In order to qualify for a spousal IRA you need to file your taxes jointly with your spouse. All the rules that apply to a regular IRA apply to a spousal IRA. Instead of contributing a maximum of $5,000 to your own IRA you can contribute $5,000 to yours and $5,000 to your spouse’s for a total of $10,000 in contributions. You can also contribute an additional $1,000 for you or your spouse if either or both of you are over 50.

Unlike a joint account where all money is kept in one account IRAs are separate accounts. If a married couple gets divorced then each partner takes their own IRA account. If you do get divorced you can’t take a tax deduction on spousal IRA contributions the year you get divorced.

Just like with regular IRAs you can receive IRA disbursements at the age of 59 ½. Creating an IRA for your non-working spouse is important to ensure an enjoyable retirement for the both of you. A financial consultant or retirement planner can give you more information if you want to learn more about spousal IRAs.