More Answers to Your Financial-Crisis Questions
Questions about the financial crisis still are pouring in. Here are five questions in response to articles I have written about recent events.
NEW (TEMPORARY) FDIC LIMITS
In your Financial-Crisis Questions Answered column you had mentioned that the financial-rescue bill increased amount of money insured by the Federal Deposit Insurance Corp. to $250,000 for individual accounts and $250,000 for each person's share of joint accounts. But isn't there a date limit on that? What happens if you have a CD that matures after the limits go back down?
You bring up a great point. Those new limits are effective until December 31, 2009. Unless Congress changes the rules again, after that date they'll drop back down to $100,000 for individually owned accounts and $100,000 for each person's share of joint accounts.
Because of this time limit, you need to be particularly careful about buying a large CD with a long maturity. "Maturity date of a CD has no impact on the insurance limit," says FDIC spokesman David Barr. If you invest $250,000 in a two-year CD today, for example, the full CD will be covered by the FDIC until December 31, 2009 (as long as you don't have any other individually titled accounts at that bank). But after that date, the FDIC coverage will drop to $100,000 -- leaving you with $150,000 that isn't insured by the FDIC for nearly 11 months.
If you're thinking about spending more than $100,000 on a CD that matures after December 31, 2009, consider spreading the money over more than one bank so you don't end up with uninsured funds after the FDIC limits go back down.
For more information about FDIC limits, see Is My Money Still Safe?
I read your Don't Rush to Ditch Your AIG Policy column, where you mentioned that people might have to pay a surrender charge if they switch out of their annuities. But if my annuity doesn't have a surrender charge, is there any downside to rolling over the money to another company?
You're right to look at the surrender charge first. Depending on the particular annuity, you might have to pay a fee of up to 10% of your account balance if you switch to another company's annuity.
But even if you aren't subject to a surrender charge -- if the annuity never had one or if you've held it long enough that the charge has disappeared -- there still could be a downside to switching companies.
No matter what type of annuity you have, it's essential to read the contract carefully before making any changes. Some variable annuities, for example, offer guaranteed minimum income benefits -- promising returns of 3% or more no matter how your investments perform -- which can be particularly valuable in a year like this. But to qualify for this benefit, you may need to take the money in a lifetime income stream rather than a lump sum. If you move the annuity to another insurer, you could lose the minimum benefits that you've accrued, leaving you instead with the actual balance of the investments. In a tumultuous market like this, your actual account balance may be much lower than the minimum guarantees, so you could lose a lot of money by switching to a new annuity.
The specific rules can vary from company to company -- and even within one insurer (AIG offers many types of annuities). Review your contract carefully and ask a lot of questions before making a change. And also look closely at any new annuity, too. It could have different investments, fees and guarantees, which may not be as good as the one you currently have. If you do switch, make sure that you roll the money directly to the new annuity rather than taking it yourself, so you won't have to pay any taxes on the exchange.
CONVERT A LOSING ROTH
Applying the concept in your article Don't Miss the Roth Recharacterization Deadline inversely, wouldn't it make sense for those of us who have lost a lot of money in their regular IRAs to convert to a Roth right now? The tax basis is probably much lower because of the financial crisis, and the stocks in the IRA are bound to recover over time.
You've got it. The smaller your IRA balance, the lower your tax bill will be when you convert to a Roth. So if you've lost a lot of money in your account, now could be a particularly good time to make the switch. And if those investments do recover over time, then you'll benefit from plenty of tax-free growth from this point on.
Keep in mind that you can convert a traditional IRA to a Roth only in years when your adjusted gross income is $100,000 or less (whether single or married). That income limit will disappear in 2010, but it could pay to jump on the opportunity now if you qualify -- who knows what will happen to your investments by 2010.
Also keep in mind that you'll need to pay taxes on the conversion. You'll be taxed on the entire IRA balance if all of your contributions had been tax-deductible. That can add up: If you're in the 25% bracket, a $50,000 conversion would result in a $12,500 tax bill. But it sure beats paying taxes on a bigger balance!
DON'T GIVE UP ON YOUR 401(K)
Because the stock market has been tanking, should I continue investing in my 401(k) while the market is low? I'm about 25 years away from retirement.
Yes, continue making the investments. This is a perfect time to make the most of dollar-cost averaging, and your 401(k) is a great place to do it.
Dollar-cost averaging means that you invest the same dollar amount at regular intervals -- which is exactly what happens when you automatically contribute money every payday to your 401(k). By investing the same amount every two weeks or month, you'll buy more shares when prices are low and fewer when prices are high. In a month like this, your regular contribution can buy a lot of shares.
This strategy also can help eliminate the urge to try to time the market -- which is extremely difficult to do. Too often, investors end up chasing performance and buying when share prices are high, then they panic and sell when prices are low -- at exactly the wrong time.
Psychologically, it can be tough to invest a lump of money on days when the Dow drops by 400 or 500 points. But that could end up being exactly the best time to invest. Nobody knows when the market will hit its bottom or which investment will do best next, so it's much less scary to make regular investments every few weeks in a well-diversified portfolio, which is exactly what you can do with your 401(k).
See Hold Fast to These Five Tenets for more investing advice that can help you during these volatile times.
WATCH OUT FOR SCAMS
My bank is in the process of being acquired, and I got an e-mail that looks like it's from the new bank, asking me to provide personal information so it can update its records. I'm usually suspicious of requests like this, but I figure the new bank might actually need to gather some information from me. Do you think this is for real?
Probably not. The Federal Trade Commission recently sent out an alert warning people that scam artists are taking advantage of the tumult in the financial-services business to lure phishing victims. Your situation is common: The phisher sends an e-mail that looks like it comes from the bank that acquired your account or mortgage and asks you to provide (or update) information about your bank account, Social Security number or credit card. The e-mail may even take you to a Web site that looks like a real bank's site. But it's usually a bogus site that collects personal information for an identity thief.
Some Wachovia customers, for example, have received phishing e-mails that fraudulently state that, because of a potential merger with Citigroup or Wells Fargo, they need to download a new security certificate to their computer. Wachovia does not send e-mails about system upgrades or require people to download a new security certificate, and it does not send e-mails asking for customers to provide, update or verify their personal information.
Don't reply to an e-mail or click on a link to send the personal information, even if it looks legitimate, and don't call the phone number from a recording or e-mail claiming to be from your bank. Instead, call the number on your bank or mortgage statement to ask questions.
See the Federal Trade Commission's Bank Failures, Mergers and Takeovers: A "Phish-erman's Special" alert. Also check out the security page of your bank's or lender's Web site to find out about current scams. And read Your ID Theft Prevention Kit for more information about protecting yourself.
Got a question? Ask Kim at firstname.lastname@example.org.