New AU -- savers certificates may be a worthwhile deal only for some
A so-so investment for most investors; a better deal for the well-to-do. That's the word from some financial advisers about the brand-new All-Savers Certificates, hailed by savings and loan associations, mutual savings banks, and commercial banks in a lengthy parade of full-page newspaper ads.
Many of the ads devote much space to explaining the new savings vehicle, a one-year certificate of deposit that lets the investor earn up to $1,000 interest tax-free, or $2,000 tax-free for a married couple filing a joint return.
Nonetheless, the All-Savers has confused many investors. They are uncertain whether it's reallym a good deal. Sensing the consumer's confusion, the Central Savings Bank in New York even installed an All-Savers hot line.
The savings institutions candidly admit the All-Savers is mis-named -- that it's best only for "some savers," namely those in higher tax brackets.
And regardless of what your tax bracket is, critics are pointing to a notice-worthy drawback: It ties your money up for a full year. You can't touch your money without getting socked with substantial penalties: Early withdrawals not only lose interest, but lose the tax exemption on the whole deal. So if you can't keep your mitts off your money, steer clear of the All-Savers.
And while some financial experts suggest it may be unwise to lock your money up for a full year in an uncertain economic climate -- even the best of forecasters have only a foggy idea how things will shape up financially a year from now -- at least one banker is using that fact as a marketing plus.
"Sure, the money is tied up for a year, but with current speculation that interest rates will go down, that makes the All-Savers a good investment [ because it locks in the interest rate]," said the Bank of Illinois's Steve Drake , in Champaign, Ill.
Roger Howarth of the Seattle First National Bank points up one reason why the All-Savers might turn out to be popular: They're comfortable.
"We expect many investors who aren't as sophisticated as buyers of other tax-sheltered investments," said Mr. Howarth. "People who like the safety and convenience -- and comfort -- of working with a bank will buy the All-Savers."
The interest rate you get on an All-Savers certificate is 70 percent of the yield paid on one-year US Treasury bills in the previous auction. The US Congress agreed to the All-Savers idea, says Fritz Elmendorf of the American Banking Association, because it wanted to help out savings-and-loans strapped for funds because of current high interest rates. This lets the savings institutions get money from you at below-market interest rates in exchange for the tax relief on the interest.
"The whole idea was to help them [thrift institutions] through the difficult times until interest rates come down," says Elmendorf. But Congress threw in one stipulation that the banks and thrifts chafe at: Three-quarters of the money lured in by the All-Savers must go for either housing or agricultural loans.
The yield offered on All-Savers Certificates when they are issued Oct. 1 is 12.61 percent. The before-tax equivalent yield depends on the tax burden of the individual in 1982. Citibank has made some rough calculations showing that a person with an approximate gross income of $20,000 will be paying, a maximum marginal tax rate of 32 percent, including federal, state and New York City income taxes; thus the before tax equivalent yield will be 18.54 percent. The same figures for the person making about $30,000 is 42 percent and 21.74 percent. And for a $50,000 income paying a marginal tax rate of 50 percent, the before tax equivalent yield is 25.22 percent. Of course, an individual's marginal tax rate will vary according to his taxable income level, which in turn depends on his deductions and so on. And only some states will make the All-Savers Certificates exempt from state income taxes.
Based on the current All-Savers yield, a couple should invest no more than $ 15,860 to obtain the maximum tax exempt $2,000 of interest. A single person should invest no more than $7,930. Any excess investment would be taxable and thus could be better invested elsewhere.
So if you're trying to figure whether buying an All-Savers Certificate is a smart move for you, financial experts say to look at several things.
1. Examine the alternatives. If you married, and make less than $20,000 a year, the All-Savers is probably not for you. It may even be a good buy for those in the $20,000 to $30,000 range, depending on tax status. See what kind of interest rates you can make investing in money market mutual funds, or T-bills, or other fully taxable investments.
2. Be sure to estimate your taxable income for 1982, not 1981. Tax rates in 1982 are lower than for 1981, and customers will receive interest from the All-Savers in 1982.
3. Decide how important it is for you to have your money stay liquid. For investors in the gray $20,000-$30,000 income range, especially, the few dollars more returned from the All-Savers may not be worth trading off for the locking up of your money for a full year.
4. Look at safety. While on the one hand, the All-Savers is the ultimately safe investment because it's insured by the Federal Deposit Insurance Corporation (FDIC), be as sure as you can of the soundness of the institution you're buying it from.