BestCashCow Best Bets for 2015

BestCashCow Best Bets for 2015

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BestCashCow.com, the most comprehensive bank rates website on the internet, unveils its Best Bets for 2015.

Shopping for a new CD, savings account, or credit card in 2015? Below are the BestCashCow best bets.

Most Innovative Online Banking Product for 2015

The most innovative online banking product introduced in 2014 and available to consumers in 2015 is CIT Bank’s flexible CD products known as RampUp CDs.    The RampUp products are Certificates of Deposit that allow online savers to take advantage of higher CD rates, yet avoid what many perceive to be the pitfalls of locking money up for an extended period of time when we may be on the precipice of dramatically higher moves in rates.   

CIT Bank is the only online bank offering RampUp CDs which range in duration from 1 to 4 years.  With more flexibility than a standard CD product, CIT’s RampUp CDs are suitable for those with either short- or longer-term savings goals.  In today’s challenging economic environment, this flexibility can help customers achieve their savings goals more easily.

Each of the RampUp products allows a 1 time rate increase if rates should rise.  The 1 and 2 year products – called RampUp Plus - also allow depositors to add to their CD balance 1 time during the course of the CD.   While CIT Bank itself offers slightly higher rates on 2, 3 and 4 year Jumbo CD products, the RampUp products all offer extremely competitive rates and are a BestCashCow.com Best Bet for 2015.

Most Interesting Opportunity Nationally for depositors to take advantage of a development in local banking

Over the last 18 months or so, several regional Massachusetts based banks have begun offering online banking at extremely competitive online savings rates.   Five banks in particular (Salem Five, East Boston Savings, Bank 5, Radius Bank and Northeast Bank) offer online savings rates above 0.85% and, even more importantly, four of the five offer these rates to residents of all US States (East Boston restricts online accounts to residents of New York State and New England).   This heavy online banking presence by Massachusetts banks is particularly interesting to savers as banks chartered in Massachusetts are covered by DIY insurance, a special insurance fund that covers deposits to a limit of $1 million per account holder (FDIC insurance only provides coverage to $250,000). DIY insurance applies regardless of the account holders’ state of residency.   While service levels may be less than optimal in some of these online banks, and banking interfaces may be less easy to work with than those of the better known online banks, this development gives those looking to deposit sums up to $1 million in a single online banking account more flexibility to pursue the most competitive rates.

Most Valuable Travel and Rewards Card for 2015

The editors of BestCashCow have voted the US Bank Club Carlson card a BestCashCow.com Best Bet for 2015.   In our view, the card ranks far and away as the best value in hotel loyalty programs for those who are able to optimize the redemption opportunities offered to its users.  The card has significant sign up and renewal benefits that are on par with any hotel rewards credit card.  New card members receive 50,000 Club Carlson Gold points immediately after signing up, plus 35,000 points after spending $2,500 in the first 3 months; card members also receive 40,000 points on each anniversary.  Moreover, each $1 spent on the card accrues 5 Club Carlson points.  Since BestCashCow values each Club Carlson point with a redemption value as high as 2 cents, this card can deliver as much as 10 cents in value per $1 spent.  A card-holder will only receive these high point redemption values if the points are redeemed at the most luxurious Radisson Blu properties in New York, London, Chicago and Paris, and if a holder also takes advantage of the last night free option on a stay of over one night.

 

Thinking of Buying a Variable Annuity?

Thinking of Buying a Variable Annuity?

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Can variable annuities make sense even if you are not in the highest tax bracket? This article is going to focus on non-qualified annuities, and in particular whether the cost of the annuity is justified based on the insurance company guarantees and tax-deferral, as well as some potential emotional advantages of annuities.

When you buy a variable annuity, you invest in sub-accounts that will rise in and fall with the value of their securities. You receive some guarantees, for example, if you die before taking withdrawals your beneficiary will receive no less than your initial contribution even if the value of investments has decreased.

Before we start analyzing whether variable annuities make sense, let’s list their advantages:

  • Tax-deferred accumulation
    • Death benefit protection
    • Longevity protection
    • Premium bonuses, and
    • Creditor protection in some states

Other than the first one, these advantages are quite small unless you are in a business where you could get sued, you live in a state where annuities are free from creditors, and sheltering significant assets from creditors is of value to you. In most cases you will not need longevity protection, that is, protection against outliving at least some of your assets, while you are accumulating wealth.

The disadvantages are as follows:

  • Surrender charges if minimum holding periods are not met
  • Mortality and expense charges
  • Administrative fees
  • Rider charges
  • 10% penalty on withdrawals prior to age 59.5
  • Withdrawals are of earnings first, then principal, and are taxed at ordinary income rates

A variable annuity could have an expense ratio of about 1.25% and investment management fees of 0.50%. Is that price low enough so that the after-tax value of the annuity exceeds the after-tax value of investments purchased outside of the annuity? Let’s look at an example:

Hypothetical Example – owner age 30, 28% tax bracket (therefore no net investment income tax from the Affordable Care Act), 8% investment return, $50,000 initial investment

At age 65, the account would be worth $417,333. A lump sum, which is not required but used here as an example, would trigger federal income taxes of $102,853, leaving the annuity owner with $314,479.

The net investment income tax would likely apply and decrease the account even further. Alternatively, by paying tax on gains each year, half at capital gains rates, half on ordinary income rates, with the same 0.5% investment management fee (so a net investment return of 7.5%), the account would grow to $370,284.  Note that this alternative assumes the owner is making investment decisions himself as working with an advisor would likely increase the investment management fee.

If the tax bracket were increased to 33%, and the 3.8% net investment income tax applies, then the account would only grow to $336,951. The higher the tax bracket and the higher the investment returns, the more valuable the tax-deferral feature of an annuity can be relative to the taxable alternative.

Circumstances will vary, and tax rates may change, but under typical circumstances the advantages of tax deferral do not outweigh the annual costs of the annuity with the possible exception of those in the highest tax brackets and those with very high investment returns.  And of course you cannot withdraw your money without penalty, and possibly adverse tax consequences, for a period of years.

Why has so much money has found its way into these products? Perhaps people don’t like taxes and look for ways to defer or eliminate them, even if the cost to do so outweighs the benefits. In addition, people may feel more comfortable with a guarantee that their initial contribution will be paid back in the event of death. They are also much more comfortable rebalancing their portfolios when taxes and transaction charges are removed from the decision. The decision not to rebalance a portfolio because of increased taxes may be more damaging than the taxes themselves.  Finally, some of the money that has found its way into annuities was in liquid savings and wasn’t needed for emergencies, so the right financial comparison in this instance is the annuity return versus 1% in a savings account.

There are scenarios where owning a variable annuity makes a great deal of sense, even when comparing to a similar investment approach outside of the annuity.

Some products offer a guaranteed increase in value (often called a step-up), regardless of market performance, for a set number of years as long as that minimum value is converted to an income benefit. Let’s examine a 55 year-old buying a product with a guaranteed step-up of 6% per year and a guaranteed minimum income benefit (a rider available at an extra cost) of 5% at age 65. His $50,000 contribution is guaranteed to generate annual income of $4,477 at age 65 and he has received his premium back in annuity payments by the time he is 76 and 2 months. All future payments are those provided by interest and/or losses to the insurance carrier. If investment performance exceeds 6% after fees, he can receive higher payments and/or possibly leave a death benefit to his heirs.

If the annuitant lives to age 90, then the internal rate of return on this investment, assuming only the minimum income benefit and ignoring taxes, is approximately 3.9%. For some people that is a reasonable rate of return for an investment with the risks and benefits of an annuity. Some variable annuities offered step-up rates of 7% or more, and annuitization rates of 7%, before the financial crisis.

Those annuities have in all probability created losses for the insurance carriers and better sleep for the annuity holders.

Before purchasing a variable annuity, answer the following questions for yourself:

  • Have I maximized my tax-preferential opportunities (401(k), IRA, etc.)?
    • Am I making a single contribution, or contributing over a period of years? (People who will be contributing over time may do better elsewhere)
    • Are step-ups and annuitization rates likely to yield increased distributions in retirement?
    • Am I going to change my investment risk because of an annuity?
      • Do I generally avoid the temptation of selling when investments have gone down and buying after they’ve already increased in value?
      • How long might I live and what will be my fixed sources of payments (e.g., Social Security and pensions)?
      • Do I understand all of the features and costs of the variable annuity being examined?

Conclusion

Weighing an annuity involves weighing risk, return, liquidity, tax-efficiency, and the strength of guarantees.  Some individuals have done very well by putting money into annuities, better than they would have with an alternative. Every investment product tries to fill a specific need, it’s just a matter of whether the expense of the product can be justified by the performance and the financial security provided. The average variable annuity owner is going to receive less in benefits than a similarly invested alternative. This should be intuitive as insurance carriers are in business to make money.

If you are looking to accumulate the most after-tax money and aren’t in the highest tax bracket, you could be better off with taxable investments than a variable annuity. But if an annuity is a way for you to increase some investment risk, gives you confidence that you’ll continue to get a check as long as you live, or you value the opportunity to get an increase in your monthly check, a variable annuity can make sense.

Securities and Investment Advisory Services offered through NFP Securities, Inc., Member FINRA/SIPC. NFP Securities, Inc. is not affiliated with J Matrik Wealth Management. NFP Securities, Inc. does not provide legal or tax advice.

NOTE: Variable annuities are long-term investments designed for retirement purposes. In the Accumulation phase, they can help you build assets on a tax-deferred basis. In the Income phase, they can provide you with guaranteed income through standard or optional features. Variable annuities are subject to insurance related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying funds. Early withdrawals are subject to company-imposed surrender charges. Withdrawals are also subject to ordinary income tax, and if taken prior to age 59½, a 10% federal tax penalty may apply. Investment involves risk, including the possible loss of principal. Your contract value when redeemed may be worth more or less than your original investment.

All optional benefits such as riders and bonuses are available for an additional cost. The guarantees associated with optional benefits are backed/subject to the claims-paying ability of the issuing insurance company. It is important to weigh the costs against the benefits when adding such options to an annuity/life insurance contract. The cost for riders varies widely but is generally between .15% to .75% of the account.


Citibank's Latest 10% Structured Note Could Be Worth A Look

Citibank's Latest 10% Structured Note Could Be Worth A Look

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Citibank latest Structured Note uses the 30-5 CMS spread like a lot of recent issues, but it also has a 9x multiplier making it very interesting.

I’ve written about Structured Notes previously.  Most of what is being marketed as Structured Notes, especially those products tied to individual equities or equity indices, should be avoided unequivocally.  Yet, I occasionally come across a product that could make sense for those seeking much higher yields than CDs offer on a small percentage of their cash, with only very negligible risk.   The Citibank note currently in syndication under 1730T0R50 / US1730T0R502 seems to fit the bill.

This Citibank Note has a 20 year maturity.  Even though it is callable earlier, it should not be considered for anything other than a very small amount of money that you do not reasonably anticipate needing in the short or even intermediate term.  It returns 10% interest over the first year in quarterly installments.   In years 2 through 19, it pays the difference between the 30 year Constant Maturity Swap (CMS) less the 5 year CMS, less 25 basis points, times a multiplier of 9.  The CMS rates are observed and payment is determined every three months, at which point the Note pays an quarterly payment which cannot be greater than 2.5% of the principal amount (or 10% a year).   (CMS basically tracks LIBOR which basically tracks 10 year US Treasuries at these maturities; you can learn more here).

The Note goes out over 20 years and anything can happen over that period, including a default by Citibank which is the only risk to principal here.   The more likely concerns are (1) that we hit a period of hyperinflation where the savings rate goes well above 10%, or whatever the Notes are paying, at some point during much of the next 20 years, and/or (2) that the yield curve becomes very narrow.   If there is less than 1.365% of premium of the 30 year CMS over the 5 year CMS, the Note will return less than 10% annually, and for any period during which it is less than 0.25%, it will pay nothing.

However, I believe that any hyperinflation would be short-lived and that there will always be an inherent time premium to the 30 year over the 5 year.  I also believe, from looking at the graph below which reflects on the last 7 years and includes both a recession and a recovery, and that that premium is likely to remain wider than 1.365%.  Therefore, in my estimation this Note is likely to deliver a 10% annual return for much, if not most, of the next 20 years or until called, and 10% is not a bad return annually.

Author's Note: The author recommends nothing greater than a very small position in these or any debt-side Structured Notes.  Most individuals will find current five year CDs to be more appropriate intermediate and long terms stores of cash.

Editor’s Note: We are often contacted at BestCashCow with queries about how to purchase these Notes.  Please note that they are available though a broker that is part of the Citibank syndicate, and not through an ordinary Citibank branch.