Starting tomorrow, financial institutions throughout metropolitan Washington and around the country will begin offering new All Savers certificates. Interested investors face crucial decisions, including how quickly to buy a certificate because of a new rate-setting government securities auction tomorrow. Here are some typical questions being asked about these new certificates and answers:
QUESTION: What are the key features of the new certificates?
ANSWER: The All Savers certificate being offered by commercial banks, mutual savings banks, savings and loan associations and credit unions is a one-year savings instrument that pays 70 percent of the yield on one-year Treasury bills.
These new certificates, approved this year by Congress, take effect tomorrow, but they can be offered only between Oct. 1, 1981 and Dec. 31, 1982. Savers/investors may exclude the interest on these certificates from income subject to federal taxes up to a maximum of $1,000 for single taxpayers and $2,000 for joint federal returns.
The tax exclusion is a one-time, lifetime exclusion of interest per individual regardless of the number of certificates purchased or the number of years in which the exclusions are taken. All interest above $1,000 ($2,000 for joint returns) is fully taxable.
If you buy one or more All Savers certificates, the tax year for exemption purposes is the year the interest is earned. You'll get a Form 1099 from financial institutions early next year outlining how much was earned in 1981, and a Form 1099 in early 1983 will outline how much was earned in 1982.
Q: Do the same income-tax exemptions apply to state returns as well?
A: It depends on where you live. In the Washington area, for example, Maryland and Virginia have authorized interest exemption from state and local income taxes to match federal policy, but the District will not exempt the interest.
To date, 16 states have announced they will allow an exemption for the All Savers interest. In addition to the two local jurisdictions, states that will exempt interest are Delaware, Kansas, Louisiana, Michigan, Montana, Nebraska, New Mexico, New York, North Dakota, Ohio, Rhode Island, Utah, Vermont and West Virginia, according to a survey published yesterday by the U.S. League of Savings Associations. Legislative action in various state capitals is expected to lengthen this list.
Maryland Comptroller Louis Goldstein noted that taxpayers in his state do not need to itemize deductions to take advantage of the exemption.
Q: What denominations will be offered?
A: The only thing certain is that the certificates must be offered in $500 denominations, because of a requirement of federal regulators. Individual banks, S&Ls and credit unions may set their own rules beyond this one mandate and, for all practical purposes, the largest deposits made will be the amount required to earn the maximum tax exclusions. Based on the initial rate for All Savers certificates -- 12.61 percent -- this translates into an investment of $15,860.43 for an interest-free yield of $2,000 (joint return) or $7,930.21 for a yield of $1,000 (single taxpayer). As for smaller deposits, some institutions (such as Maryland Federal S&L) are accepting minimum deposits of $100 and some institutions are giving premiums (alarm clocks, cash, watches) for deposits of various minimum requirements. Arlington-Fairfax S&L will give you $20 for an All Savers deposit of $5,000 and American Security Bank will give you $10 for a $500 deposit, for example. Every bank, S&L and credit union has a different plan, so shop around.
Q: How is the interest rate determined?
A: The rate is 70 percent of investment yield for the previous auction of one-year Treasury bills, normally held every four weeks on a Thursday. The new rate becomes effective on the Sunday following the auction and remains in effect until the Saturday after the next auction. NOTE WELL: The investment yield applies, not the discount rate (which is lower, since in effect purchasers of bills get a refund at the time of purchase by not paying the full face amount).
The first rate was set by the one-month auction on Sept. 3 when the investment yield was 17.26 percent and the next rate, effective for certificates sold starting next Monday morning, will be established at the auction scheduled for tomorrow on one-year bills--ironically, the same date the new tax law becomes effective.
Thus, savers face a quick decision this week. If the previous rate is higher than the rate that is based on tomorrow's auction, it is to savers' benefit to buy certificates by the close of business this week. Some financial institutions have late hours on Friday and some have Saturday hours, which will allow more time for such purchases. Extra hours are being planned this week by several institutions. If the rate after tomorrow's auction is higher than that of Sept. 3, the higher return will be available on All Savers certificates purchased Monday or thereafter.
Some institutions are suggesting that customers complete paperwork to buy certificates, and have promised to invest either on Friday or on Monday to take advantage of the higher rate, whichever it is. Most market experts expect that interest rates will decline at tomorrow's auction and perhaps for several months to come, which could mean long lines at all types of financial institutions on Friday and Saturday as customers seek to sign up for higher rates pegged to the Sept. 3 auction.
Q: Who may purchase All Savers certificates?
A: Federal regulators have ruled that individuals, corporations or any other entity eligible to maintain time deposits at depository institutions may invest in the certificates. But the life-time exclusion from gross income for interest earned is limited to individuals.
Q: Can the maturity of a certificate be extended?
A: No. There is a required maturity of one year from date of deposit.
Q: If not enough interest has been earned to reach the full tax exemption, can another certificate be bought when a certificate matures?
A: Yes. But remember that the certificate must be renewed or a new one purchased prior to Jan. 1, 1983, when the authorization of All Savers certificates expires (unless the law is amended). If you plan to buy one and extend it for another year, you must buy the first one this year. If you buy a certificate now and don't give additional instructions to the financial institution involved, the money you deposit will begin earning the passbook account savings rate after one year, in most cases.
Q: What if cash is needed quickly? Can I cash in my All Savers certificate with no delay? Is there a penalty?
A: If any portion of a certificate is withdrawn prior to the one-year maturity, the saver loses exemption on all interest earned. In addition, there is a penalty of three months' interest on the amount withdrawn. But you can get the money back, as long as you understand that you suffer these penalties on whatever interest you have earned at the time of withdrawal.
Q: When is interest to be paid?
A: Check with your bank, credit union or S&L. Institutions are permitted to pay quarterly or monthly and a variety of plans exist, although most All Savers certificate deposit programs promise interest only at maturity (especially where premiums are offered initially).
Q: Who will benefit from the All Savers certificates?
A: Some savers and, in particular, the depressed savings and loan industry. In general, if you're in a tax bracket of 29 percent or less, you'll be better off with a taxable return equal to or exceeding the then-current yield on one-year Treasury bills, provided you have the money to make such investments. Some other savers in even higher tax brackets won't benefit from the All Savers rates. But every individual has to look at his or her situation: A single person with $11,000 of taxable income and an All Savers certificate of 12.61 percent would have to earn an equivalent of at least 16.59 percent on a nontax-exempt investment, and that may require a high minimum investment.
The U.S. League of Savings Associations, which heavily promoted the All Savers certificate in Congress and beat back Reagan administration hesitation about the concept, has forecast that all types of financial institutions will attract as much as $250 billion of All Savers deposits in the 15 months during which they are available. The certificates will be attractive to the financial institutions because the instruments will cost them less in terms of interest paid out than the current market rates for money and permit S&Ls to reduce operating losses. The S&Ls hope to attract funds now going to money market mutual funds, but given the climate on Wall Street, some money that has been in stocks also appears headed for the new certificates. The overall economic impact is not known.
Financial institutions are required to invest 75 percent of new deposits gained by the certificates in real estate or agricultural loans. However, most real estate experts expect little help for the hard-pressed housing industry. S&Ls and banks won't be making a lot of new, long-term mortgage loans at cheaper rates just because they are getting a batch of new savings for a short period of time at lower rates. Instead, the money will be applied to current housing investments to reduce costs.