You and Your Retirement Account

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Whether you have retired or just switching jobs, this article is for you. In this first part we will go over employee stock options and what to do with them. In the second installment we will go over your 401k, your IRA, and what to do about them. Happy investing

 
 
Most people, at some point in their career find themselves changing jobs at least once. Long gone are the days when one stayed in his/hers job from fresh out of college to retirement. The reason for this is not something we will get into in this article. This is for those who find themselves with some sort of retirement plan that needs their attention.
Quite often, part of an individual’s compensation comes in the form of employee stock options. If you have not been given stock options, or the opportunity to purchase them, you will probably have heard of them, but not heard enough to appreciate what a wonderful product you have here.
Employee stock options are shares of the company’s own stock, and are often free, or at a deep discount. Employee stock options are often used as tools other than cash to attract top industry talent.
Here is an example of what one’s compensation package may entail. For the purpose of this article let’s just say that IBM is selling for twenty dollars a share. Fred has just been offered the option to buy one thousand shares of his company’s stock for sixteen dollars a share.
So that does that mean for Fred? He can purchase a few chairs or all one thousand of them at the discounted price of found of sixteen, or sixteen thousand dollars. Fred can now sell all or part of his shares at the new market price of twenty dollars a share. Now there is a risk here. Your stock options will have an expiration date, and it is possible for them to expire worthless.  
The more value a company places on their new hire, the deeper the discounted the stock price will be. Quite often a new employee will be given stock options for just pennies a share, but that is generally reserved for the upper echelons of the companies personal.
One must always keep an eye on his/hers options less they do expire worthless. I recall on particularly sad story involving a young woman and her stock options. As the expiration date drew near, several of us made numerous attempts to contact her. We even filled up her answering machine warning her about the upcoming expiration date. She had a large number of shares and was not in the position where she could afford to lose out on that money. Each phone call ended with some variation of “I don’t have time to deal with this now. I will call you when I am ready.”
She finally did call us back and I happened to hear part of that phone conversation and it was not pretty. She had just lost over two hundred thousand dollars and there was nothing any of us could do about it.
So what are my options when I exercise my options, and what are my tax consequences, if any?  When you decide to exercise your option, so you don’t have a disaster like the individual above, you have two basic choices.
·         Exercise and hold.
·         Exercise and Sell
 If you decide to exercise your options and there is a difference between the grant price (that is the cost of the shares that were granted to you) and the market price of the stock when you exercise, you will have a tax consequence and you need to talk to your tax professional.
If you decide to exercise your options and buy them (you pay the grant price) then of course you will have to pay taxes on the gain, or difference between the grant price and the market price of the stock the day you exercise them.
Here is a short example. Fred, when hired by Xoomoo Tech. was given a thousand shares of the company’s stock at one dollar a share and he is thrilled because the current market price was five dollars a share. Fred is required to hold his shares for two years before he is able to exericise.Two years later Fred decides to exercise his employee stock options, and he would like to exercise all one thousand shares. Fred pays one thousand dollars (a figure based his grant price and the number of shares exercised). Seeing that Xoomoo is trading at six dollars a share, he decides to lock in the profit and sell his shares on the market. Fred just made five thousand dollars, but has a long term taxable gain of five thousand dollars. If Fred had chosen to hold on to his shares, it is still a taxable event as Fred has a paper gain of five thousand dollars. Contact your tax professional.
Alright, so now you know just a little more about your retirement account, so in the second issue in this series we will cover what your options are with regards to leaving your account as is, or change into a self directed retirement account.
Happy Investing.

Savings Rates Down and CD Rates Mixed - Weekly Rate Update Sept. 11, 2009

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Treasuries showed strength this week, with Treasury bond yields staying low despite continued supply via auctions. The Fed has signaled on many occasions that it expects rates to remain low for some time. This week it was the Fed Vice Chairman Donald Kohn who said that a “large and rapid rise” in short-term rates is unlikely because of slow or no worlwide economic growth and the lack of inflation. Indeed mortgage bond yields declined to their lowest levels in 3-months and mortgage rates are expected to follow these yields down.

Still with government borrowing expected to accleerate to fund the $1.85 trillion deficit, some analysts expect rates to rise as the supply of Treasuries overwhelms demand, forcing the government to raise the rate it offers to attract more buyers. That combined with some stirrings in the economy is the only hope at the moment that rates will rise in the medium-term.

So, far the data doesn't show any significant change in the current low-rate environment. As the chart below shows, long term 5-year CD rates seem to have largely stabilized with the average according to the BestCashCow rate table stabilizing in the 3.3% APY range. Rates on other products and terms though continue to drift lower. At this point, unless there is a significant uptick in inflation or economic growth, it's hard to see any change to this dynamic. While rates have pretty much stabilized, they have stabilized at a pretty low level. And at this point, if rates are going to move, it looks like they will still move gradually down.

There's no significant change to report in the spread between savings rates and 36-month CDs. The spread ticked up a bit but nothing that isn't within the normal range of the past few months. Notice that the spread between savings and 3-year CDs that we saw widen in the spring is still there, a sign that the economy is poised for expansion. One wonders who will blink first: will longer term CD yields come down in the absence of any sign of inflation, or will short term savings and CD accounts rise as the economy strengthens?

Based on this data, it would seem that any rate increases won't come until sometime in 2010. I would stay short-term and wait. An improving economy and a glut of Treasury debt will eventually put some pressure on rates.

The spread between the average BestCashCow savings rates and 36-month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.


Savings and CD Rates Drift Lower - Rate Update Sept 4, 2009

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Even as the economy continues to show signs of firming and the stock market continues its upward trend, the rate on savings accounts and many CDs continue their downward movement. It's clear that until the Fed raises the Fed Funds rate, money markets, cds, and savings accounts will pay low yields. The only consolation is that inflation remains low, meaning the actual inflation adjusted return is higher.

As the chart below shows, savings as well as 12-month and 36-month CD rates moved down again last week to their lowest levels since we began tracking rates. The slope of the decline has slowed and is now more like a slow downward drift. It seems that like the economy, that we have probably hit bottom, or are close to it. The average savings rate according to the BestCashCow rate tables has fallen from 3.64% APY last year to 1.77% APY today. The rate you'll have find at your corner bank is probably a good deal lower.

There's no significant change to report in the spread between savings rates and 36-month CDs. The spread ticked up a bit but nothing that isn't within the normal range of the past few months. Notice that the spread between savings and 3-year CDs that we saw widen in the spring is still there, a sign that the economy is poised for expansion. One wonders who will blink first: will longer term CD yields come down in the absence of any sign of inflation, or will short term savings and CD accounts rise as the economy strengthens?

I still think that the bias is towards rate increases later in the year so I would stay short-term and wait. An improving economy will force the Fed to eventually raise rates, and that will cause yields to start rising.

The spread between the average BestCashCow savings rates and 36-month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.


Savings and CD Rates Continue Fall Even As Economy Stabilizes

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Savings and CD rates continued to drop over the summer even as the stock market went on one of its longest winning streaks in history, shooting above 9,000 and getting giddy analysts to call for it to rise above the 10,000 mark before long.

August 17, 2009 Update

I wrote the following back in June, before the lazy days of summer:

"Individual bank rates may fall a bit from here but for the most part rates seem to have bottomed, as shown by the chart below. Even savings accounts, the most liquid and sensitive to the Fed Funds Rate (currently at 0%) has flatlined and is no longer on its steep downward slope. Indeed, we've even seen a few banks increase their rates."

Ah, if only that were true. Savings and CD rates continued to drop over the summer even as the stock market went on one of its longest winning streaks in history, shooting above 9,000 and getting giddy analysts to call for it to rise above the 10,000 mark before long.

As the chart below shows, there was nothing to be optimistic about from a savings or cd rate perspective. The average savings account rate according to the BestCashCow rate table is paying 1.8% APY. And those are the top rates in the country! If you walk into Bank of America or Chase, they'll ask you to pay them - practically. Last year at this time, the average savings rate was 3.6% APY. Nothing to write home about but still a lot better than today. The story is much the same with CDs.

The average 12-month CD rate is only slightly better than the savings account rate at 2% APY and banks will pay you 3.22% APY to lock your money in for 5 years.

As the chart below shows, the spread between savings rates and 36-month CD has remained fairly steady over the summer - both have gone down!

So what's a saver to do? With the economy looking like it's on the mend and the Fed and government still pumping trillions, it's hard to justify locking money into a long-term CD. The time to do that was 18 months ago when rates were 5% APY+. For now, I think it's best to stay short-term and wait. An improving economy will force the Fed to eventually raise rates, and that will cause yields to start rising.

The spread between the average BestCashCow savings rates and 36-month CD rates remains steady as the economy stabilizes and investors, banks, and consumers wait to get the next read on where the economy is going.


Dollar Savings Direct / Emigrant Starts to List Its Foreclosed Homes on Its Online Banking Site

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I haven't seen this before. I suppose that it is a sign of the times.

Emigrant Direct and Dollar Savings Direct (both owned by Emigrant Bank) has started to list its foreclosed homes for sale on its online banking website.

They have put a link to "real estate opportunities" just below the sign in for online banking accounts.

While it seems a little unusual, it makes sense for the bank to use this avenue to get exposure for its inventory of foreclosed homes and to try to a direct to market approach with these properties through its deposit vehicles.

 


WTDirect Offering $150 Bonus to Open Savings Account

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WTDirect is at it again, offering $150 to open a savings account. This is similar to a promotion they ran last year.

WTDirect is at it again, offering $150 to open a savings account.  This is similar to a promotion they ran last year.

Deposit $50,000 into a WT Direct savings account by July 31, 2009, keep the money in their through October and the $150 will be added to your account balance.  WT Direct is paying a lower bonus for smaller deposit amounts:

Bonus amounts start at $25 for the first $10,000 and increase by $25 for each additional $10 deposited, up to the $150.

WT Direct is currently offering 1.76% APY on its savings accounts for the first 60 days.  If your balance falls below this amount after the 60 days, the rate falls to .15% APY. Compare WT Direct's rate to other savings and money market rates on the BestCashCow rate tables.