Monday, March 7, 2011


As suggested in an earlier blog posting, I'm gradually moving our money closer to home.  Funds are on their way, destined for FDIC-insured certificates of deposit.  Current interest rates lead me to wonder if we, as individuals, are being asked to cough up what in effect is more bailout money for struggling banks.  I know there's more to it than that -- the guiding light for traditional banks has long been the "spread," the difference between what banks pay for their money and the amount they charge when they lend it -- but still I'm allowed to wonder...

Anyway, the branch manager at a local bank thought I ought to talk to their investment guy.  I agreed, hoping he'd teach me a thing or two.  Actually, I wanted to see what sort of "experts" wander the nearby countryside.

The visit was worth the half-hour for one reason.  Since I'm hung up on FDIC insurance and not interested in exposing these funds to the vagaries of stock markets or insurance companies (annuities) -- for which he apparently thinks I'm a fool and a stupid fool at that -- he suggested I sign up for the highest yielding CD his bank offers for IRA customers, which happens to be a CD with a term of 5 years or so.  Because I'm approaching the magic age of 59 1/2, if rates go up in a year or two, I could cash it in and move the funds to a higher-yielding CD, with no penalty and no questions asked.

This reminded me of Federal Reserve Regulation D (Reserve Requirements) and a portion of its definition of a time deposit:

(b) Where the depository institution pays all or a portion of a time deposit representing funds contributed to an individual retirement account or a Keogh (H.R.10) plan established pursuant to 26 U.S.C. 408 or 26 U.S.C. 401 or to a 401(k) plan established pursuant to 26 U.S.C. 401(k) when the individual for whose benefit the account is maintained attains age 59 1/2or is disabled (as defined in 26 U.S.C. 72(m)(7)) or thereafter....
"What on earth is the point of that?" asks Virginia.

Well, to make a long story short, a bank doesn't have to hold reserves on time deposits, while it does on many other types of accounts, such as checking accounts.  Higher reserves make those other deposits more costly for the bank.  To keep CDs out of that other category, banks have to impose restrictions on withdrawals -- but not on IRA customers over age 59 1/2.

What I found interesting was the bank's openness regarding its willingness to let me escape my 5-year contract.  Cool.

The young man stepped into a mud puddle before I left.  Trying to coax me into something that would net him a commission, he griped that some financial pundits refer to the 2000s as the "lost decade" and insisted that some investments have averaged 8% per year over that decade.  When I asked for an example, he offered the Income Fund of America.  Uh-oh.  If you're interested, visit and see if you can find that 8% figure.

No comments:

Post a Comment