Banks turn to special CD deals

With interest rates on CDs and money market accounts remaining at a historic low and the stock market continuing its jittery roller-coaster ride, many people are wondering if there are any safe investments out there at all.

Stock market slumps, such as the most recent one triggered by European financial crisis and the failure of the budget deficit Supercommittee, normally send many investors to such safe havens as cash deposits and CDs.

But with the best CD rates only reaching a little more than 1 percent on a five-year CD, some investors are wondering what they need to do with their money. A one-year certificate of deposit--earning an average of 0.35 percent last week--brings home only $35 for a $10,000 investment.

And those low rates are not expected to change any time soon. The Federal Reserve has vowed to keep interest rates low for another 18 months or so.

One answer might be at your own neighborhood bank. According to the Pittsburgh Post-Gazette, community banks around the country are offering special rates on certificates of deposit.

Community banks are offering the special rates on certificates of deposits largely for people who maintain other accounts with them. So if you're desperate and want to use any edge you can get in this low interest rate world, check with your bank and see what kind of deals they can offer you.

Some banks are also offering greater flexibility on certificates of deposit. Ally Bank, for instance, has a no-penalty certificate of deposit that gives you the freedom of closing an 11-month CD at any time after seven days without paying a penalty. That should be enough to keep you out of a three-month or six-month certificate of deposit.

Ally and other banks are also offering bump-up CDs, which allow you to raise your rates at least once during the term of your certificate of deposit. Longer terms may allow additional bump-ups. Typically you have to take a lower interest rate to get these freedoms, but some banks are allowing additional deposits and bump-ups while still posting competitive interest rates.

New tax options for near-retirees

The IRS has increased the maximum amount of money you can put into your 401(k) retirement savings account for the tax year 2012, raising it by $500 to $17,000.

That's not a huge amount, but you might want to use the occasion to not only increase your 401(k) contributions, but also look at other tax season savings available to you.

Workers over 50 years old can kick in an additional $5,500 to catch up on savings. That amount wasn't increased along with the maximum contributions, however. Annual contributions to traditional and Roth IRAs will remain limited to $6,000.

Why the contribution level went up

The increase is the first since 2009 and it reflects an increase in the cost of living. The IRS explained that the cost-of-living index met the statutory thresholds needed to trigger an adjustment.

This could affect the 33 percent of workers ages 21-64 in the U.S. who use 401(k) savings account programs. According to the Associated Press, only 9 percent of those with a 401(k) retirement savings account contributed the maximum amount to their plans.

The elective deferral limit for 403(b), most 457 plans and the federal Thrift Savings Plan also increased from $16,500 to $17,000.

Other ways to save on taxes

Although 401(k) retirement savings accounts are the biggest work-related tax benefit, there are other tax-related benefits that workers should consider taking advantage of next year as they adjust their 401(k) deductions.

One of those is a flexible health spending account, which lets you set aside up to $5,000 of pre-tax earnings to pay for doctor's visits, co-pays, medicine and other health-related expenses. Even over-the-counter medicines such as pain relievers and sunblock can be purchased from this account if it's prescribed by your doctor.

Although the IRS hasn't previously capped how much you can put in your health spending account, starting in 2013 your contributions will be limited to $2,500 a year.

Another flexible spending account for dependent care lets you set aside pre-tax dollars for child care or elder care. That savings account is capped at $5,000 a year, and both you and your spouse have to be working to qualify.

The benefits of retirement cash

As you plan your tax benefits for 2013, consider accumulating some unencumbered cash as a portion of your retirement savings accounts. Although interest rates on deposit accounts are low--even those earning the highest CD rates--cash reserves are not subject to wild fluctuations like the stock market and can add stability.

Having cash for a year's worth of living expenses is also wise as you approach retirement age. That way if there is a downturn just as you retire, you can live off the cash rather than having to sell stocks at low prices.

Study: 401(k) advisement is worth it

If you thought your 401(k) investments were a no-brainer--just pick a few funds and forget about it--think again.

A new study from Aon Hewitt and Financial Engines has found that people who sought advice on their 401(k) savings accounts had a median annual return of almost 3 percent higher than does who didn't consult an expert. That's including the fees they paid for the advice.

Three percent may not sound like much, but according to the Wall Street Journal, it adds up. An investor who put $10,000 into her 401(k) savings account at the age of 45 would have $71,400 after 20 years if they sought advice. Those who invested the same amount but made all their own decisions on the appropriate risk levels and other factors would have just $42,100.

Aon Hewitt and Financial Engines are in the business of making money by offering 401(k) investments advice, of course, but their findings are difficult to dispute. The study examined eight large 401(k) plans with more than 400,000 participants over a five-year period, and those who enrolled in a managed account or whose investments included a plan-managed target date funds--both considered looking for help--made fewer mistakes that would affect the overall performance of their 401(k) retirement savings account.

Mistakes people make

According to the Wall Street Journal, people who don't seek advice tend to stay in the same risky investments they made when they were younger. When you're 30, your portfolio can tolerate aggressive investing because if you lose money you still have many years to rebuild your savings accounts. But those who don't seek advice tend to stay in risky investments into their 60s, long after they should have retreated to safer investments that protect their nest egg.

The Journal also noted that unschooled investors will panic when the market drops and miss out when the market recovers.

According to the Associated Press, this type of behavior was exhibited in 2008, when the Standard & Poor's 500 index fell nearly 40 percent. Many 401(k) investors pulled out of stocks at that time, suffered damaging losses, and didn't returned to investing in time for the 26 percent recovery in 2009.

The help they need

Target date funds are accounts where investments--and the level of risk--is determined by how close the investor is to retirement. As a target date fund account holder gets older, more and more of her money is put into less-risky investments because that person would have fewer years of work and saving to recoup losses before reaching retirement age.

Some employers automatically enroll workers in target date funds.

The study also looked at managed accounts, in which a professional makes the investment decisions. Older investors were more likely to get this type of personalized help, and these types of accounts perform better than the other two types of assistance--target-date funds and online savings account advice, the study found.

The study also revealed that many older workers tend to hold too much of the stock offered by the company they work for, which puts them in risk of losing their job as well as their savings if the company goes belly up.

What's the moral of the story? Well, according to the advice-givers, the secret is to get advice.

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