Ask Liz Weston

Get smart with your money

FDIC insurance

Q&A: After a windfall, questions on what to do with the cash

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Dear Liz: After selling my house and downsizing at age 84, I am cash rich for the first time in my life. My goal now is not so much to grow the money substantially, but to avoid paying taxes on my investments, as I would have to do with certificates of deposit. Are tax-free municipal bonds my best option, or what would you suggest?

Answer: If you’re in a high tax bracket — roughly 32% or higher — the lower interest rates paid on municipal bonds can still give you a good-enough return to make buying them worthwhile. If you’re in a low tax bracket, the math doesn’t work so well.

Also, municipal bonds aren’t covered by FDIC insurance the way a certificate of deposit would be. Investing in bonds involves some risk. The chances of default are minimal if you choose highly-rated bonds, but your bonds could lose value if interest rates rise.

Consider using some of your cash to consult a fiduciary, fee-only planner who can help you figure out a strategy that reflects all aspects of your financial situation, not just your tax bill.

Are two savings accounts safer than one?

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Dear Liz: My wife and I will be receiving a sizable amount of money. We want to put the money into a high-yield joint savings account. We don’t want to exceed the FDIC protection. Can we each open joint accounts at the same bank and have each account covered up to the $250,000 limit?

Answer: That’s not quite how it works.

FDIC insurance is per depositor, per ownership category. Ownership categories include single accounts, joint accounts, certain retirement accounts such as IRAs and trust accounts, among others.

A joint account for the two of you would be covered up to $500,000, or $250,000 for each owner. A second joint account at the same bank would not increase your insurance coverage. If you had one joint account plus two single accounts, then your total coverage at the bank would be $1 million ($500,000 for the joint account, plus $250,000 for each individual account).

This assumes none of the accounts has beneficiaries. Naming one or more beneficiaries turns either joint or single accounts into trust accounts, for insurance purposes. Each owner of a trust account is covered up to $250,000 per beneficiary, to a maximum of $1.25 million for five or more beneficiaries.

Weak bank? Maybe it’s time to move your money

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Dear Liz: I have all my money (less than $150,000) in one small bank. I love my bank, but Bankrate.com’s Safe and Sound report shows the bank having only a single star. I asked someone at the bank about it, and this person said the rating wasn’t important. Is it?

Answer: Of course it is. Your deposits are under the $250,000 limit protected by the FDIC, but a weak bank can fail, which can be disruptive to depositors. The bank that takes over typically doesn’t have to abide by the policies or interest rates promised by the failed bank. If regulators can’t find another bank willing to take over, you may have limited access to your money for a few days until your deposits are refunded to you.

A bank with “very questionable asset quality, well below standard capitalization and lower than normal liquidity” — phrases Bankrate.com uses to describe your institution — probably isn’t the best place to have your money.