Massachusetts' Depositors Insurance Fund (DIF) Is Important for High Net Worth Depositors to Consider

Massachusetts' Depositors Insurance Fund (DIF) Is Important for High Net Worth Depositors to Consider

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Many Massachusetts-based banks now offer competitive online savings accounts. Can depositors rely on the Commonwealth's Depositors Insurance Fund and deposit amounts over FDIC limits in these banks?

The Depositors Insurance Fund (DIF) was created in 1934 and, while independently operated, includes all Massachusetts licensed banks as members.  According to DIF’s website, the Fund extends coverage above and beyond FDIC limits to depositors at member banks regardless of their states of residency.

DIF has over $350 million in assets. During the recession of the early 1990s, the worst financial period in the history of the Massachusetts savings bank industry, DIF paid out more than $50 million to protect over 6,500 depositors in 19 failed member banks.   During the 2008 to 2011 bank crises, the DIF was not affected by the spate of bank failures as none of its members were among those banks that either failed or were seized by the FDIC.  Funds in the Massachusetts DIF are highly regulated today by the Massachusetts Division of Banks, and the fund again has significant reserves on hand to cover failures of member banks.

There are now three highly competitive online banks in Massachusetts, all members of the DIF.  Assuming the DIF website is correct that all depositors are covered regardless of their state of residency, a depositor who might otherwise be inclined to keep online savings accounts below the FDIC’s individual $250,000 insurance limit could now be covered in depositing well over that amount in a DIF member bank.

EBSBDirect, a subsidiary of East Boston Savings Bank, currently offers online depositors 2.50% on deposits up to $1 million in an online savings account.  Bank 5 Connect and Salem Five Direct are also Massachusetts-based banks that are covered by DIF and that have been competitive in the online savings / money market and CD spaces in recent years.   

Some Massachusetts-based banks have had some customer service problems in the past, and they may not provide online banking interfaces or customer services comparable to Ally or Marcus.  Salem Five Direct has bank fees that are excessive for online savings accounts and make it a less than desirable place to put cash that may be needed quickly and/or often.  BankFive Connect has a website with nice pictures but relatively sophomoric customer service.

Depositors for whom FDIC limits are not an issue may find that it makes more sense to stick with well-recognized online banks and their superior customer services.   Even many depositors with $2 million or so to deposit in online savings accounts may find that they can achieve their goals and stay within FDIC limits by distributing their money among several banks with outstanding customer service.  However, depositors seeking to hold significantly larger amounts in online savings and money market accounts may find the protection they require from Massachusetts’ DIF insurance and deposit amounts above FDIC limits in one or more of these Massachusetts-based online savings and money market accounts.


Duke Energy's PremierNotes Are An Inappropriate Place to Stash Cash

Duke Energy's PremierNotes Are An Inappropriate Place to Stash Cash

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Duke Energy has begun to advertise an unsecured commercial paper program. While the company is offering yields that are as high as 1.51%, these notes are uninsured, and hence represent an inappropriate place to stash cash for most.

No matter what the environment, most people have some amount of money that they cannot afford to lose.   And, in order not to lose the money, they refrain from investing it in riskier assets and accept a so-called risk-free rate.  Risk-free rates are historically savings accounts, CD rates and the 10-year US Treasury.   Today, the US Treasury curve is very compressed, causing many to argue that treasuries and even short-term CDs involve a risk to principal should rates rise.  Hence, the only real risk free asset at the moment are cash accounts (savings or money market accounts) and those are only risk free when amounts over $250,000 per individual per insitution are spread across multiple banks or credit unions.

Against this backdrop, Duke Energy has sought to introduce something new for investors to stash cash. PremierNotes program are according to the Duke Energy website:

"... direct investments in new debt obligations of Duke Energy. Under the program, Duke Energy borrows directly from investors by issuing notes. In return, investors receive a competitive floating rate of interest that is very favorable compared to other cash alternatives like bank accounts, short term CDs and money market mutual funds."

Companies offering notes directly to investors is nothing new.[1] Duke is currently offering 1.51% on balances over $50,000 in its PremierNotes program.  Longer term, it commits to return 25 basis points above average money market fund rates.

Even though the rate on deposits over $50,000 is above any current savings or money market rate, most depositors will find that the slight increase in yield does not justify the risk involved in foregoing FDIC or NCUA insurance and relying entirely on Duke Energy’s ability to pay.   Duke’s junior unsubordinated debt is rated BBB-/Baa3 and its commercial paper rating is A-2/P-2.

Duke Energy, of course, is a great company.   It is the energy producer and distributor in the fastest growing region in the US.  Its equity is yielding 4.20% and while expensive on a historical P/E basis, it can be hedged in a manner in which you would receive about the same premium for your exposure to the company and still get all the upside.  For most, that is a far better way to play Duke.

 

[1] The idea of a place to stash cash that outranks savings and money market accounts and is secured by the credit rating of a major conglomerate, and not by the FDIC or NCUA is not all together new.  Companies such as GE, Ford and GM have occasionally targeted depositors and investors for their cash accounts with commercial paper programs.  Most companies discontinued these programs. GE still offers a program, called GE Capital Invest Direct or GE Capital Interest Plus, that today offers depositors 1.11% on deposits over $50,000; it is virtually unknown and should be completely avoided as depositors can get rates that are higher or as high from several FDIC and NCUA-insured institutions

Image: Stuart Miles at FreeDigitalPhotos.net

Advantages and Disadvantages of Custodial Savings Accounts

Advantages and Disadvantages of Custodial Savings Accounts

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Custodial savings accounts are bank accounts set up by a parent for a child that can contain either savings accounts, CDs, or a combination of both. Using them as a savings vehicle present several advantages and disadvantages.

Custodial savings accounts are bank accounts set up by a parent for a child that can contain either savings accounts, CDs, or a combination of both. In fact, most general custodial accounts can also contain stocks and bonds. The money deposited into a custodial account becomes the property of the child but cannot be withdrawn without permission from the custodian until the child reaches adulthood (between 18-21 depending on the state).

Custodial accounts have several advantages and disadvantages as a savings vehicle for minors.

Advantages

  • Safety. Money placed into a custodial savings account cannot be withdrawn or used without the permission of the custodian.
  • Flexibility. The money, with custodian permission, can be withdrawn at any time and used for any reason. Money in 529 Plans can only be withdrawn for college expenses.
  • Potential tax advantages. Some minors may benefit from tax savings by placing their funds into a custodial account. Individuals under 18 (or 24 if a full-time student) do not need to pay tax on the first $850 in interest income generated from the account. The next $850 is taxed at the child’s income level, usually low. Any income over $1,700 is taxed at the custodian’s income, which can be substantially higher. Thus, if a child is generating significant income from the account, a custodian account may create a significant tax burden.  For interest income below $1,700, custodial accounts offer tax benefits.

Disadvantages

  • Money is Theirs. Once the money is given to the child in the custodian account, it is theirs. Legally, the money can only be used for expenses that benefit the child. And once they reach adulthood (18-21), they can spend it on whatever they want. The flexibility is a double-edged sword.
  • Tax Disadvantages. If the account generates more than $1,700 in investment income and the custodian has a high tax rate, the account will generate a significant tax bill for the minor. Over 30% of the income from the account could be taken in taxes. 529 Plans on the other hand allow contributions to grow tax deferred, and distributions used to pay for college come out federally tax-free.
  • Financial Aid Penalty. Money in a custodial account is counted as part of a student’s assets when they apply for financial aid.  This may negatively impact the aid application.

Eligibility & Contribution Rules

Any adult can set up a custodial savings account for a child under 18 years of age. There is no limit to the amount that can be contributed to these accounts but parents should be aware of the potential tax ramifications of depositing significant cash and generating sizable income from the account.

Transferability

The funds in a custodial account cannot be transferred to another child, unlike 529 plans and Coverdell ESA’s.

Where to Open

Many banks offer custodial savings account for minors under 18.

Image: Stuart Miles at FreeDigitalPhotos.net