Connect with us

Personal Finance

What Is a Crypto Interest Account?

Published

on

This article provides information for educational purposes. NerdWallet does not offer advisory or brokerage services, nor does it recommend specific investments, including stocks, securities or cryptocurrencies.

Some cryptocurrency platforms, such as BlockFi and Gemini, have begun to offer a way to earn interest on crypto. The process has parallels with traditional savings accounts, and the rates can be eye-popping, with some in the double digits.

But like most crypto activities, there are big risks in losing more money than you earn with these accounts. Here’s a quick explainer on how crypto interest accounts work.

What is a crypto interest account?

A crypto interest account is generally a crypto platform’s offering that lets you earn interest on digital assets that you’ve bought. You agree to lend out Bitcoin or altcoins (any cryptocurrency that isn’t Bitcoin) in exchange for interest. This is similar to how savings accounts work at banks: You deposit money, then the bank lends it out and pays you back plus interest. You can generally take your money out anytime.

“It does work conceptually identical to how banking institutions lend money,” says Ryan Greiser, a certified financial planner in Doylestown, Pennsylvania.

But the differences in rates and risk, among other factors, are huge.

7 things to know about crypto interest accounts

1. Rates can be astronomically high

The crypto firm BlockFi, for example, offers rates from 0.10% to 9.50% on its website, and the firm Celsius has several yields around 9% — with one nearly at 14% — for U.S. customers (there’s a 17% rate for non-U.S. customers). The best high-yield savings accounts, in contrast, tend to have interest rates closer to 0.50% annual percentage yield. And the national average rate for a regular savings account is 0.06%.

2. Returns over time are hard to compare

With traditional savings accounts, everything is in U.S. dollars so you can estimate the total possible interest you can earn in a year, assuming a rate doesn’t change. When browsing a crypto firm’s rates, however, you might be looking at dozens of digital assets with varying levels of volatility. It’s good to be familiar with at least two broad types of digital assets:

  • Native cryptocurrencies such as Bitcoin and Ethereum can have daily fluctuations in value.

  • Stablecoins such as USD Coin are a type of cryptocurrency with value that is pegged to the U.S. dollar or another real asset.

3. Withdrawal fees and limits may apply

Watch out for fees that may vary by cryptocurrency and might not be listed in U.S. dollars. Also, check for any minimum or maximum withdrawal amounts. Some crypto firms offer different types of access:

  • Flexible terms have no constraints on when you can withdraw.

  • Fixed terms require agreeing to not access funds for a period, generally a few months. These fixed-term yields have parallels to certificates of deposit, a type of savings account where you lock up funds in exchange for a higher rate. (If the idea of locking up crypto for more rewards appeals to you, you may also be interested in crypto staking, which involves helping to verify valid crypto transactions on a blockchain network.)

4. Crypto has big risks

Risks include but aren’t limited to:

  • No deposit insurance: Crypto interest accounts are not insured by the Federal Deposit Insurance Corporation, so if a firm goes bankrupt, there’s no government guarantee that you can get funds (including interest) back.

  • Default risk: What if a borrower can’t pay you back? Greiser recommends understanding what measures a crypto exchange is taking in case borrowers default on their crypto loans (which might be using the crypto you’re lending). Crypto exchange Gemini, for example, explains on its site how it’s regulated by the New York government and how it vets borrowers’ risk management processes.

  • Digital assets can lose value, and some can go extinct: There are more than 13,000 cryptocurrencies, according to market research website CoinMarketCap.com, and it’s unlikely they’ll all go up in value over time. Some might even go away completely. You can find “dead coins,” or previous crypto that went out of circulation, on websites such as Coinopsy and Deadcoins.

5. Regulation of crypto interest accounts is underway

In September, Coinbase — the biggest U.S. crypto exchange — canceled its launch of a lending product that would earn interest for customers. This action occurred after Coinbase received notice that the U.S. Securities and Exchange Commission threatened to sue, though the reason wasn’t clear, Coinbase wrote in a blog post. In addition, securities regulators in two states have ordered BlockFi to stop opening new interest accounts for customers, according to BlockFi’s website. There’s likely more regulation to come, which could affect the usage of these accounts.

6. Not all crypto firms work in all states

BlockFi’s and Crypto.com’s platforms, for example, aren’t available to New Yorkers, though the accounts are options in most states.

7. Crypto is not for everyone

Greiser says the person who has the right risk appetite, time horizon and willingness to do their own due diligence and research may consider crypto interest accounts. In doing research, you’ll likely need to learn various technical processes, such as how to transfer crypto between platforms or from a crypto wallet outside a platform and how to report crypto earnings or losses for taxes. If you’re just getting started, consider these three questions before buying cryptocurrency.

The author owned Bitcoin and Ether at the time of publication. NerdWallet is not recommending or advising readers to buy or sell Bitcoin or any other cryptocurrency.

Advertisement

This post was originally published on this site

Continue Reading

Personal Finance

3 Times You Need Money Advice From a Human

Published

on

You can now manage most aspects of your money without ever consulting another human being. You can budget, borrow, save, invest, buy insurance, prepare your tax return and create a will — among many other tasks — by using apps, websites and software.

But technology still has limitations, especially when you’re facing a money situation that’s complex or involves judgment calls. Consider consulting a human expert in the following situations:

1. You’re dropped by your homeowners insurance

Insurers typically can’t cancel a policy after 60 days unless you fail to pay premiums, commit fraud or make serious misrepresentations on your application, according to the Insurance Information Institute, a trade group. However, insurers can decide not to renew your policy when it expires.

With auto insurance, you often have many options after such a “non-renewal.” Even if you’ve had accidents or multiple claims, you typically can find coverage with companies that specialize in higher-risk drivers.

If a homeowners insurance company dumps you, however, you may have trouble finding coverage, says insurance consumer advocate Amy Bach. That’s especially true if you were dropped because you made too many claims, or your area is considered high risk because of wildfires, extreme weather or crime, for example.

How would other companies know? Insurers share such information in databases, and application forms typically ask if you’ve been “non-renewed” by another insurer, Bach says.

Bach’s nonprofit organization, United Policyholders, recommends seeking out an independent agent or broker who has relationships with several insurance companies. The agent or broker should know which insurers may be more receptive to your application and can put in a good word for you, Bach says. While most underwriting decisions are made by computers, there are still ways for human beings to override the algorithms.

“It will make a difference if [the agent or broker] can call an underwriter that they know and vouch for you as a good bet,” Bach says.

If your area has been labeled high risk, ask your neighbors for referrals to agents or brokers who helped them find coverage. Otherwise, you can ask an accountant, attorney or financial planner if they have recommendations. Friends and family may be able to provide leads as well.

2. You’re facing a “face-to-face” tax audit

Most IRS audits are conducted through the mail and are relatively routine. The IRS sends a letter requesting additional documentation to support a deduction or other tax break you’ve taken. If you mail back sufficient evidence, your case will be closed with no taxes owed. Otherwise, the IRS will mail you a bill.

However, if the IRS wants to meet with you, the stakes get much higher. In fiscal year 2020, the average amount of additional taxes recommended in face-to-face audits was nearly 10 times larger than the average for a correspondence audit: $72,210 versus $7,658, according to IRS statistics.

Even tax pros hire someone to represent them in face-to-face audits, says Leonard Wright, a San Diego certified public accountant and financial planner. Wright has plenty of experience: He was chief financial officer of a company that was audited, and his personal tax returns have been audited four times. In each case, he hired another CPA to represent him.

It’s all too easy to say something you shouldn’t when you’re under scrutiny, Wright says. You could volunteer information that might not be helpful to your case, or get defensive or confrontational.

“You don’t want it to become personal, and you don’t want to ruffle the feathers of the auditor,” Wright says.

If you used a tax preparer, you may assume that person can represent you in an audit, but that’s not always the case. Typically CPAs, attorneys and enrolled agents can represent clients in IRS audits, but other tax pros usually can’t. Your tax preparer may be able to refer you to someone who can represent you, or you can get referrals from friends, family or financial advisors.

3. You’re creating an estate plan

Will-making software and estate-planning sites can help you create essential legal documents if money is tight. Otherwise, you should probably consult an attorney, says Betsy Hannibal, senior legal editor for self-help legal site Nolo.

“Why not get personalized advice that’s tailored to your situation, if you can?” Hannibal says.

Getting help is particularly important if you need or want to do something complicated with your estate like putting conditions on a bequest, providing for someone with special needs or creating a trust, she says. You’ll also want an attorney’s help if you have a lot of debt, because there may be ways to protect your assets from creditors. Finally, consult an attorney if you think someone might contest your will. A lawyer can put additional protections into place and serve as a professional witness that you knew what you were doing, Bach says.

“If someone doesn’t think you were in your right mind, going through an attorney can help make sure that (a legal challenge) can’t go forward,” she says.

This article is meant to provide background information and should not be considered legal guidance.

This article was written by NerdWallet and was originally published by the Associated Press.

Advertisement

This post was originally published on this site

Continue Reading

Personal Finance

Roth IRA Contributions – What You Should Know

Published

on

For nearly everyone, the Roth IRA is the ideal place to start the journey to building a retirement fund. While most people have heard of them, they are still a bit misunderstood. That could mostly be because many people find it difficult to even begin investing due to the complexity.

However, just know that if you are still a bit unsure about the idea of opening a Roth IRA, you’re not alone. This article will provide you with foundational knowledge to have an educated conversation with your financial advisor as to whether a Roth IRA is right for you.

Roth IRA – What Is It?

A Roth IRA is a type of tax-advantaged retirement account that anyone in the U.S. can open who meets a few minimum requirements, which we’ll get into later. The Roth IRA allows one to deposit money regularly, or all at once, up to certain annual maximum limits.

Most major investment firms offer investors the option to open a Roth IRA, and the funds you deposit would be held separately from your regular brokerage funds, if any. This is because of the tax advantages offered to Roth IRA funds.

The most important benefit of a Roth IRA is that all profits enjoyed over the life of the account are tax exempt.

Requirements to Open a Roth IRA

The Roth IRA was created in 1997 as a way for middle-income Americans to enjoy some tax benefits not afforded to those of wealthier status. The first requirement to open a Roth IRA is that your income falls below certain maximum limits. For single filers, your gross income should be below $140,000, and for married filers, your gross income should fall below $208,000.1

It’s important to note that there is a bit of a workaround to these income limits. While the standard requirements are fairly straightforward, you should consider consulting with a financial advisor and perhaps a tax professional as well. You might be able to contribute to a Roth IRA account if you make more than the incomes limits via “backdoor” Roth IRA contributions.

Another requirement to open a Roth IRA is that you have what is known as “earned income.” This means that you earned taxable compensation for work performed which can be reported on a W2, 1099, or other similar IRS form for income.

Pension allowances management for retirement funds

Benefits of a Roth IRA

As we mentioned earlier, the most important benefit to a Roth IRA is the tax-exempt status of the returns on your investments.

Another little-known benefit of a Roth IRA is that it can act as an emergency fund. A 401(k), for example, comes with restrictions to almost all withdrawals. While you can technically withdraw funds from a 401(k), these distributions could – and most likely will – be subject to heavy tax penalties for early withdrawal.

In the case of the Roth IRA, you can withdraw all funds you’ve deposited, also known as principle, without any penalties. While you can withdraw principal investments at any time, any withdrawal of profits prior to age 59 ½ will generally be subject to heavy tax penalties like those of early withdrawal from a 401(k) or Traditional IRA.

Drawbacks of a Roth IRA

Returning to the 401(k) example, the maximum contribution limit for 2021 is $19,500.2 This brings us to the major drawback of the Roth IRA, which is that the maximum contribution per year is $6,000 for those below age 50. Those older than 50 are able to contribute up to $7,000 per year.

Consider maximizing both your company-sponsored retirement plan contribution and the Roth IRA contribution if you have the means.

What’s Next: What You Should Know About Roth IRAs

The Roth IRA is often said to be funded by “after-tax” income. This means that all money that goes into a Roth IRA has already been taxed via your regular income tax rate. While there are a few requirements you must meet prior to opening a Roth IRA, they are available to nearly anyone who can show earned income, and they have many tax advantages that, over time, could provide enormous benefits to those building up their retirement accounts.

If you still have more questions about Roth IRA contributions, check out this article from Pittsburgh financial advisors, Fragasso Financial Advisors, for some more insights. You should always consult with a financial and tax professional before making any decisions.

Investment Advice offered by Investment Advisor Representatives through Fragasso Financial Advisors, a registered investment advisor.

This post was originally published on this site

Continue Reading

Personal Finance

Financial planners say their clients thank them most for 5 smart money tips

Published

on

Financial planners say their clients appreciate personalized advice.

  • Financial planners say their clients get the most value from a handful of money tips.
  • Those tips include how to save for the near future, and how to choose the right life insurance.
  • Other advice: Time in the market is better than timing the market, and use your HSA to invest.
  • Vanguard Personal Advisor Services

When it comes to managing your personal finances, there's a lot of advice that gets floated around. You might find yourself asking friends for tips, reading articles for hours, or even scrolling social media to see what your favorite financial influencers have to say.

I spend a lot of quality time learning about finances and trying to figure out how to optimize and enhance my own portfolio. When I talk to financial planners and advisors, I find myself inundated with so much good information that it can be overwhelming. That's why I decided to try to find the best tips that financial planners give to their clients by asking them which tidbits of information make their clients thank them again and again. Here's what they had to say.



Don't just save for the faraway future

Many people work hard now and save for their future retirement. But Jake Northrup, a financial planner and advisor, says that it's not enough to just save for later on in life, and his clients appreciate his strategies that focus on the near future as well.

"You need to save in the right ways to provide you with the flexibility to use money throughout your life, rather than just waiting until age 59.5 when most pre-tax account penalties disappear," says Northrup.

He encourages his clients to save in different "buckets," each with a corresponding investment strategy: zero to five years, five to 15 years, and 15+ years.

"Many people handcuff their ability to enjoy money throughout life because they only save in their 401(k). By also saving into a Roth IRA and brokerage account, you give yourself the flexibility to utilize money much earlier in life," says Northrup.

Get a financial education

If there's one thing I've learned in my own personal finance journey, it's that you have to seek out personalized advice along the way. Financial planner Cody Garrett says that personalized education during the financial planning process always garners tremendous appreciation later on.

Says Garrett, "Unlike financial 'advice' that tells others what to do, education provides the clarity and confidence for families to make their own well-informed decisions. Given the uncertainty and financial variables out of our control on the path to and through retirement, having clarity about one's financial situation and a measurable action plan to refine the plan has greater value than the numbers on the page."

What kind of life insurance is needed

A big part of working with a financial planner or advisor is getting help figuring out what types of insurance you need. Charles H Thomas III, a financial planner, says that it means a lot to clients when he can help them plan for big situations that could happen later on.

"I work with lots of families who know they need life insurance to protect their children, but are unsure where to start or how much they need," says Thomas. "When I work with a family to see what future obligations need to be covered, like college, income replacement, and more, it removes a lot of stress and uncertainty from the decision."

Treat your HSA as a long-term investment account

Perhaps some of the best advice involves strategies that aren't so obvious.

Financial planner Kevin Mahoney finds that one of his most helpful pieces of advice is to treat your health savings account like a powerful long-term investment account.

"Many of the millennials with whom I meet have not considered how an HSA may fit into their overall investment strategy," says Mahoney. "For my peers who do have these accounts, they often spend the contributions in the same tax year or don't take advantage of the HSA's investment option. But the HSA's triple tax benefits mean that contributions invested today in low-cost, diversified funds can grow to significant amounts by the time retirement (and our larger healthcare expenditures) arrives."

Time in the market is better than timing the market

When it comes to getting advice on investing in the market, there are varying schools of thought. Financial planner Keith Onto says clients appreciate it when he reminds them that time in the market is more important than timing the market.

"I can't tell you how many times clients have reached out and asked whether now is the time to sell and move to cash in anticipation of the next correction," says Onto. "No one can consistently time the market, and more often than not the market has gone the opposite direction of what the client may expect. More importantly, the client needs to be reminded of the time horizon for their individual goals."

Related Content Module: More Financial Planner Coverage

Read the original article on Business Insider

This post was originally published on this site

Continue Reading

Trending

SmallBiz Newsletter

Join our newsletter for the latest information, news and products that are vital to running a successful SmallBiz.