How Good is Your Bank? Factors to Consider

As bank customers, we’re used to getting almost no interest on our balances. The U.S. Federal Reserve dropped interest rates to an historic low of 0.25 percent during the 2008 financial crisis, and kept them there for seven years. The central bank is only now beginning to accelerate the pace of rate hikes. It’s targeting a 1.4 percent federal funds rate by the end of 2017, and 2.1 percent by the end of next year.

Along with these higher rates comes the possibility of getting better returns on the money parked in your traditional bank account. Here are a few options to consider:

1. Online savings accounts

Online savings accounts often offer higher returns on your money, lower fees, or both. Several online savings banks are offering 1.5 percent returns on balances as of the fourth quarter of 2017. That compares with the national average return of all savings accounts of just 0.09 percent, according to the independent consumer banking information site Bankrate.com. Online savings accounts do have a downside: less service. There is no branch to go to, so any problems or complaints will have to be dealt with remotely. Many online accounts don’t provide ATM cards for convenient cash withdrawals. And online accounts may arguably be more vulnerable to cyber attacks and scams.

Is it for you? If you can be diligent about your online security and don’t mind some of the physical limitations, online savings accounts are among the best places to get a good return.

2. Money market accounts

Money market accounts are invested in low-risk securities and typically offer higher rates of return than traditional savings accounts. Some offered as much as 1.4 percent during the fourth quarter, according to Bankrate.com. They also have some features of checking accounts, including the ability to write a limited number of checks per month, and ATM withdrawals. Money markets do have some drawbacks: most require you to maintain a minimum balance of a few thousand dollars or more. Money market rates fluctuate, and can even turn negative in times of severe financial stress, as happened during the 2008 financial crisis.

Is it for you? Money markets are a good option if you want higher rates of return along with the utility of a checking account.

3. Certificates of deposit

If you want the highest return possible on cash savings, a certificate of deposit (CD) with your brick-and-mortar bank may be the way to go. But CDs require you to commit the money to the bank for a set period of time, and you pay a penalty if you withdraw money early. The best returns on one-year CDs were 1.75 percent during the fourth quarter, according to Bankrate.com.

Is it for you? Consider CDs if you’re certain you won’t need the money for a year or more. Though CDs are available for terms of five years or longer, you should consider that higher returns may become available if the Fed continues to raise rates.

Before you switch banks, don’t forget these steps:

First, according to manager Chris Cicalese, CPA, MSTFP, “The best place to start looking at banks is with your CPA. As business advisors, we as CPAs have a lot of connections at different banks and can help you find a bank that meets all of your needs. ”

Once you have chosen you top prospects, remember to do the following before you migrate funds to any new bank:

• Check out the bank. Not all banks are created equal. Check to ensure there are few consumer complaints and that the bank is in good financial condition.
• Check that balances are insured. Federal Deposit Insurance Corporation (FDIC) insurance is standard in the U.S., but double-check it.
• Expect interest taxes. All the above accounts provide interest subject to ordinary income taxes.

 
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.