Current research figures suggest that over 80% of all internet users do online banking, and that the demand for the online savings account is at an all time high. Online banking has created some win-win situations for both the banks and for consumers. Online only banks have significantly lower overheads than traditional banks as they do away with the need for expensive branch networks. The win for consumers not only comes in the form of added convenience with access to your account 24/7 but because banks can pass the savings onto consumers in the form of lower fees and higher returns. The key reason quoted for the attractiveness of the online savings account, is the higher interest earnings draw card.

When selecting an online savings account, there is no one size fits all product. Your financial behaviour is a key factor in choosing an online savings account- especially in as far as transacting volume and saving patterns are concerned.

Here’s what to look out for when comparing online savings accounts.

Interest Rates

Check the interest rates payable on the account and compare them to others on the market to ensure they are competitive. Make sure you know if the interest rate is a standard variable rate or simply an introductory rate for a fixed period, e.g. 6% for 12 months. Check how interest is calculated and paid. The most common method used is to calculate interest daily and for it to be paid monthly.

Minimum Deposit

Look out for the minimum deposit required when opening an account. Many online high interest saving accounts have no minimum deposit required but there are some that may require an initial lump sum, say $2,000 to open the account.

Account Fees

Check whether there is any fees payable on the account. These may be in the form of a monthly account fee or usage related fees such as charges for making a transaction or contacting customer services via phone instead of online.

Interest Penalties

There may be indirect account fees payable too. Look out for online saving accounts that charge an interest penalty when withdrawing money from your account. A common penalty is that you may earn no interest for the entire month in which a withdrawal is made.

Read beyond the headlines

Make sure you understand the full details of the online savings account offer that you see. A promotion may advertise ‘earn up to 6% interest’. In this case you’d want to see if all your money would be earning the 6%. Some banks have a range of interest rates that apply depending on how much money you have in the account. Ideally every dollar should be earning the same high interest rate.

Accessing your money

Before applying for an account, think about how you may need to access the money and how quickly you’d need to access it. Many online banks work by linking your savings account to your normal everyday bank account. This is cost effective and often fee free but may take a couple of days for the money to get to your bank account. Some online banks provide an ATM card providing instant access to your funds.

Build your savings wealth faster

It’s easier to set up an online savings account and then neglect to add money on a regular basis. When applying for an account you should think about setting up a regular direct debit from your everyday bank account. By making a regular deposit each month you’ll soon find your savings and interest earnings starting to add up.

The Good News

The good news is that many of the online saving account offers on the market are very competitive and you will find a range of offers with high interest rates, no minimum balance requirements and no fees or penalties. Just be sure to compare the variety of online savings accounts available before you apply online.

Step 1

Choose which return to file the interest on, the parents’ return or a separate return with the child only. This avoids the need for filing a separate return for your children. The other option is to file a return for the child in addition to your return.

Step 2

Determine the amount of interest earned. This would be the amounts of all 1099 INTs issued in the child’s name. If the amount is more than $1,900, it’s possible that a Form 8615 would be required. This form would be required under the following conditions:

1. that the child would be under age 18 (or age 24 if a full time student).
2. Another condition exists that would require the child to file his or her own tax return.
3. That the child does not file a joint tax return. And, 4. that at least one of the child’s parents be alive at the end of the tax year. The Form 8615 includes calculations for figuring a child’s taxable interest payments. If the amount earned is less than $9,500 the parents can opt to include that amount on their own tax return without needing a separate one for their child.

They may do so on the following conditions:

1. The age requirements are similar in that the child must be under the age of 19 or 24 if a full time student.
2. There was no other income earned outside of interest payments or investments. 3. The child’s gross income can’t exceed a total of $9,500.
4. The child is required to file a return unless this election is made to include it on the parent’s return.
5. The child cannot file a joint return for the year.
6. There can have been no estimated taxes paid throughout the year or federal with-holdings from the earnings. Making this election requires the Form 8814 which must be filed with the 1040 long form.

Step 3

Decide which option to pursue. By far claiming your child’s interest on your return is easier than paying to have one more return prepared. If you are required to file two returns there are a couple of things to remember.

One, your child’s return can be filed and you can still claim the child as an exemption and a dependent by indicating you wish to do so on his return. File both together or e-file yours and mail the child’s return.
Two, this is not a return you can have filed by the simple basic return preparers at a local tax preparation franchise. More than likely, they’ve never seen an 8814 or 8615 in all their years of practice. The disadvantage to this option is that the child’s earnings will get taxed at a typically higher rate, yours.

The other option (filing two returns) may save you on taxes paid out of your child’s earnings, but the requirements are strict and must be followed to the letter. The additional costs to prepare two returns will increase the actual cost of this option as well.

The main benefit of a high interest savings account of course, is that the higher interest rate gives you a better return on your money. Traditionally, interest rates for savings accounts have not been very high, but with the advent and popularity of online-only accounts that offer such great rates and no fees, banks have been forced to re-think what they offer their customers in an effort to keep them.

To be able to get a good return on your money is paramount, but just as important is low or no risk, and low or no fees. Many high interest accounts have minimal fees, or you can keep them down by limiting your transaction number per month.

However, convenience is also a consideration. While many customers left their traditional banks to take advantage of the better interest rates elsewhere, it may not have been nearly as convenient to have their assets divided. If they wanted to transfer money from one to another, it would take some days before the deed was finalized in real time, even though it was done so quickly online. These customers would be pleased to see that banks now offer high interest savings accounts with the convenience of having your other accounts at the same bank.

Those who avail themselves of the high interest savings accounts now offered by most banks and other financial institutions need to watch that fine print to see what features their account offers. Some features can be considered less than beneficial when you could lose the high interest offered if you either don’t make regular monthly deposits, or if you withdraw.

Although the interest rates in savings have been at an all-time low, still the best savings account rates can fetch you a substantial amount of interest and other perks if you are able to judiciously select the right one. The best rates will also enable the person to be frugal and start saving on his expenditure, so that he is able to get a better rate of return on his investment.

Rates:

There are the best rates that can fetch you interest rates from as low as 2.4% to as high as 6%. The medium range is an average of about 3.5% In the best rates in US.

There is a severe competition for deposits amongst banks and they try to lure the best of customers by the use of the Best Savings Account Rates. Customers have also wizened up and they will not go in for the savings until they have researched online and found out the best of deals on offer. Many a customer has begun to realize that it is quite futile to lock up the capital in deposits, as if they were to withdraw their money before term, they would attract harsh penalty.

The rates in US are offered by FNBO Direct, Union Federal Savings Bank, OnBank, HSBC Direct, and Flagstar Bank. All of these are currently offering an interest rate of 3.5% and one could start the Savings Account with as little as $1 and there are no monthly maintenance fees too on this.

With pensions fading away and 401k’s becoming one of the major reliance’s of retirement planning everyone wants to know the best setup for their 401K. While the best setup is generally what you mentally feel comfortable with saving for retirement, we can offer a few general tips and guidelines to help you choose. Please remember higher risk has potential for greater gains and losses, while lower risk is the opposite.

Portfolio Selection

Typically all 401K plans offer the following categories when choosing funds to place your money in: growth, capital preservation, income, balanced, and sometimes stock in the company for which you work.

Capital Preservation Funds

Capital preservation funds are designed to preserve your savings principal. They typically invest in government securities with a predictable rate of return. This is the lowest risk category with the lowest returns. The returns have been known to under perform inflation, which means you could lose buying power in any given year. For example, if the economy inflates at 4% and you get a 3% return on your savings, then you have 1% less buying power than the previous year. Simplified, a TV costs $100 this year and after inflation of 4% the TV costs $104 ($100*4%). Your savings account with $100 had a 3% return leaving you with $103 ($100*3%).

Income Funds

Income funds usually diversify your money into various bonds and are typically for long-term gains. While the exposure to any type of loss is very rare, it is not impossible. With the low amount of risk that comes with income funds you will generally see a lower return then the average of the New York Stock Exchange.

Balanced Funds

Balanced funds try to get the best of all worlds by diversifying between international stocks, domestic stocks, and fixed income securities. These funds are very reliant on the fund managers to choose the right mix to protect and grow your savings. If you are unsure which percentage of your funds you wish to devote to the various other funds, then you may want to consider a balanced fund. Before placing your money into one of these funds, please ensure that you research the funds management history and current manager.

Growth Funds

The “riskiest” of all investments is the growth fund, but it also has room for unimaginable returns. Over the long run these funds typically out perform the stock market because they are invested in international bonds and markets, small cap stocks, and emerging markets of developing nations. It is not uncommon for the annual returns to follow a pattern as such: -73%, 115%, 50%, -33%, 83%. These funds are subject to a variety of factors that some funds are not such as: oil prices, civil wars, and medical epidemics.

Company Stock

Everyone remembers the Enron scandal where thousands of employees lost all of their retirement savings in less than a year. While this is not always the case with companies and some may be very well and dependable, please keep situations like the above-mentioned in mind and take proper precautions to protect your finances. I do not recommend placing more than 10 percent of your savings portfolio into your company stock; however, the choice is completely up to you.

Choosing the Right Mix

With so many options it is hard for an individual to make a choice between various funds. Because everyone has different financial needs and situations the worst thing you can do is pick the same options as your co-workers without giving it a second thought. Before placing your money into any of the categories you will want to consider the following:

Years before retirement How much money you need Your reaction to sudden market drops
How many years before you retire?

One of the most important factors is how many years you plan to continue working. If you have a long time left to work (over 10 years) then a good idea may be to place the majority of your assets in growth funds. The longer you have left to work the more aggressive you should be while saving for your retirement. As you get closer to your retirement age (less than 10 years) you will want to consider starting to migrate some of your growth funds into balanced or conservative funds so your nest egg has less sensitivity to market drops

How much money do you need?

How much money you need goes hand-in-hand with how many years you have left to work. A lot of financial planners can assist you with determining how much money you should place into your savings each month based off these two factors. You can estimate this yourself by doing the math or using an online financial calculator. I recommend an online calculator or use of a Microsoft Excel spreadsheet to save yourself the time. Here is an example of what the math would look like. Take your expected rate of return on your savings and multiply it against the amount you save each year so that the first year looks like this:

Year 1: $4,000 (your yearly savings) % 1.08 (8%) = $4,320
Year 2: $4,320 (previous balance) + $4,000 (annual addition to savings) = $7,320 * 1.08 = $7,905
Continue to do this formula until you reach the year you desire, there are calculators that can do the math for you. Just type in “retirement calculator” in Google and you are sure to get results.

If the market crashed…would you care?

The #1 determining factor of where people place their retirement savings is mentality. Regardless of what you should and shouldn’t do with your retirement fund, if you are not able to mentally handle the results then it is not worth doing. I would never recommend to someone to place all of their money in growth funds if they would not like the idea of losing half of their money in a single month. Whatever you decide to place your money into, please ensure that you are okay with the decision. Remember, it’s never a real loss until you sell, any growth fund capable of losing half your nestegg in a year or less is also capable of returning it.

Tax Deferred or Taxed Contributions?

Another important determining factor is whether or not to save with after-tax contributions or before-tax contributions. Unlike regular savings accounts, 401K’s have the option putting money into them without being subject to federal income tax. Here is a list of things you should consider before choosing either option:

Your tax bracket If the money will be used for emergencies
What is your tax bracket now and what will it be?

Generally speaking if you are in a high tax bracket and plan on making less money when you retire than you would want to consider tax-deferred contributions. Tax-deferred contributions are deferred on taxes up until the point when you start withdrawing the money. If you are currently making enough money to be in let’s say, the 33% tax bracket, but when you retire you only plan on being in the 25% tax bracket, then you should definitely consider placing your money into your 401k as tax deferred. By deferring taxes until you withdraw the money after retirement in the 25% tax bracket you would be saving 8% on taxes (33%-25%) and on top by deferring you have 33% more money in your fund that can grow tax deferred. If you tax deferred $5,000 a year into your 401k and it grew at 8% a year for 30 years; you’re ending balance would be about $611,729.34 which you would draw out in monthly payments that would be taxed at 25% or whichever bracket you fall into after retirement. If you took that same $5,000 dollars but put your money in after tax your final balance for the same scenario would be about $409,858.66, the difference is that you would not have to pay taxes on this money because you have already paid them. You would have about 50% more money in your account after 30 years.

The opposite also holds true. If you are currently in a 15% tax bracket but plan on retiring and being in a 25% bracket, then you may opt to place after tax money into your 401k.

Please keep in mind everyone’s situation is unique and that you should find yourself a good financial advisor or planner if you are unsure of which is best for you.

Is this money going to be used for emergencies?

If you are using your 401K as an emergency buffer account for things that ARE NOT: Primary Residence purchasers, Medical Emergencies, and things of this nature and plan on USING it for things such as credit card debt, paying late bills, and other things related, then you will definitely want to take into consideration the 10% tax penalty and tax consequences of making a withdrawal for these things.

If you take a withdrawal on a tax-deferred 401K that is a non-emergency than you will be subject to not only income tax on that money but a 10% tax penalty as well. Please take that into consideration before making any unnecessary withdrawals. Also, you can always get a loan from your 401K but it is not recommended because you lose savings principal to earn interest on and you have to pay it back at an interest rate probably around 8%.