What's in an Acronym
IRA (Individual Retirement Account)
An Individual Retirement Account (IRA) is a tool used to set aside assets and investments for retirement, where your assets can grow in the account tax-free. An individual opens their own IRA with a financial institution, making it different than a 401K account, which is opened for employees by most employers. There are a few different types of IRAs, and each has specific eligibility, distribution, and withdrawal restrictions, as well as a government cap on yearly contributions.
Because you can keep stocks, bonds, and other assets in your retirement account, an IRA is often mistaken for an investment in-and-of-itself. However, an IRA is just the account that holds your investments, and there is little risk associated with opening one. Most of the risks associated with IRAs come from breaching the regulations already in place when you open your account. For instance, choosing to withdraw your assets before you reach your retirement eligibility requirements (sometimes done in the case of an emergency) results in strict, and usually costly, penalties.
The two most common types of IRAs are Traditional IRA and Roth IRA. One main difference between a Traditional or Roth account is when you pay the income taxes on your funds. Traditional IRA funds are deposited pre-tax, and the funds are taxed as income when removed from the account. Roth IRA funds are taxed upon deposit, and therefore can be withdrawn tax-free upon retirement.
Additionally, Roth IRAs have income limitations in order to qualify, but are more flexible regarding distribution and certain types of early withdrawal than Traditional IRAs. For example, a Roth IRA allows penalty-free removal of funds to pay higher education costs or go toward the purchase of your first home. Roth IRAs also allow your account to grow as long into retirement as you like, while Traditional IRAs have a set age level at which you are required to begin withdrawing or redistributing your funds.
Besides the security of earmarking certain assets for your future, the main benefit of IRAs (regardless of type) is that your assets, including any interest or capital gains, can grow tax-free inside the account. An IRA can be an incredibly helpful tool in long-term planning for retirement, and you will earn the most benefits by depositing as much as the government allows (and as much as you are financially able) into your account. However, make sure you understand the terms and limitations of your IRA. If you are saving for an emergency fund or planned future purchase, a high-interest savings account might be a better option.
At Columbia Bank, we know that sorting out the different requirements and terms of each type of IRA can be a confusing process, and somewhat daunting. We offer assistance with both Traditional IRAs and Roth IRAs. Contact Columbia Bank or visit our Investment and Wealth Management Center to learn which type of Individual Retirement Account you qualify for, or to get started in setting up an account!
HSA (Health Savings Account)
An HSA (health savings account) is a medical savings account available to taxpayers in the United States that allows participants to gain tax advantages while saving for future medical costs.
The primary eligibility requirement for all HSAs is that the owner of an HSA account must be enrolled in a high-deductible health insurance plan, either individually purchased or provided through his or her employer. The owner must not be covered by any other health plan, enrolled for Medicare benefits, or claimed as a dependent on another person's tax return. Anyone can contribute to a qualified HSA account (employers, family members, etc.), as long as the owner of the account meets the eligibility requirements.
HSA-Qualified Medical Costs
The owner of an HSA can withdraw funds tax-free at any time for any qualified medical costs. Copayments, dental work, vision correction, and chiropractic care are a few examples of HSA-qualified medical costs, which are not covered by many standard health plans. If the owner wishes to withdraw the funds for non-medical expenses, the distributions will be taxed and subject to penalty, similar to withdrawing funds from an IRA before retirement. After reaching age 65, HSA funds can be withdrawn for any reason with no penalties.
Benefits of an HSA
If you are eligible for an HSA, in relatively good health, and you or your employer are able to make regular contributions to your account, you can gain substantial tax benefits over time and eventually withdraw the funds for medical costs or out-of-pocket costs that you're likely to incur during retirement.
HSAs are typically most beneficial in situations where current health care needs are low and contributions to the HSA can be high over a long period of time. A major appeal of HSAs is that the contributed funds can be rolled over from year to year, and withdrawn tax-free for qualified medical purposes of the owner's choice, in any amount, at any time.
Columbia Bank can help you set up your high-interest, tax-exempt health savings account, and we'll even go through the eligibility, contribution, and distribution specifications with you. Contact Columbia Bank with any questions about retirement, education, or health savings accounts, or to set up an account now!
NSF (Non-Sufficient Funds)
What Is Non-Sufficient Funds?
"Non-sufficient funds" (NSF) is a term used by banks and financial organizations to signify that there are not enough funds in a bank account to honor an attempted transaction. Checks that result in an NSF notice are informally known as "bad" or "bounced checks."
An NSF transaction can result in a number of penalties, both from your banking institution and the check recipient. Depending on your bank's policies and your account preferences, sometimes a bank will honor a bad check (sparing you the various returned-check penalties they could incur from the vendor). Still, this often results in costly overdraft fees and restrictions applied to your account.
If you receive an NSF notice unexpectedly, reach out to the vendor immediately to reconcile any pending payments. You should also check your account history to make sure the NSF notice wasn't sent in error, and then contact your bank. It is especially important to make sure you're aware of any bank or vendor penalties or holds on your account so that you can avoid a potential waterfall-effect of faulty transactions.
In general, one NSF transaction or overdraft won't damage your credit, but repeated slip-ups can eventually affect your financial standing.
Avoiding NSF Penalties
Because debit and credit card transactions take place almost instantly (and a charge can be declined immediately and without penalty), most NSF notices are the result of either scheduled transactions or checks.
The best way to avoid non-sufficient funds incidents completely is to keep close track of your budget, your bank account balance, and any checks you've written until you see them post to your account. It is also a good idea to set up a back-up plan with your bank in case of an overdraft. For example, you can have your bank accounts set up so that any overdrafts from your checking account are automatically covered by a savings account.
Because NSF practices and policies vary from bank to bank, and even from account to account, make sure you know the overdraft and NSF policies whenever setting up an account.
Columbia Bank is up-front with all of our overdraft policies and any related fees for all of our bank accounts. And with Columbia Bank's online and mobile banking services, you can access your account information at any time, from anywhere to avoid NSF notices altogether. Contact Columbia Bank to discuss specifics about any of our checking, savings, or business banking accounts.
What is APY? About Annual Percentage Yields
Annual Percentage Yield (APY) is the compounded interest rate applied for an entire year to a deposit or investment. You can use the APY to estimate the amount of money you'll earn on a deposit in a year. APYs are advertised so that consumers can make banking choices with a standardized tool for comparing their options. In general, a higher APY will earn you more money on a deposit.
An APY is a reliable reflection of the actual earnings you would make on a deposit in a year, because it takes compounding into account (while a flat interest rate does not). This means that an APY factors in the adjusted interest amount you earn in later months on the interest you've already accrued in the previous months. There are mathematical formulas for finding out an APY on your own, but, if not advertised, it is easiest just to ask your bank, credit union, or broker for the APY before making any deposit or investment decisions.
Annual percentage yield is sometimes considered to be the opposite of the annual percentage rate (APR), which is the tool for calculating the annualized interest you would pay on a loan. The difference is that APR does not take compounding into account, meaning you can often pay more interest on a loan or credit card than you were expecting. The disparity is not as important when considering an APY, but it's useful to note that APRs are not always as straightforward as APYs, and the two should not be seen as reversed formulas when considering loan options.
When comparing your options for a deposit or investment, however, the APY can be your most helpful tool. Columbia Bank offers competitive, tiered APYs for all of our savings or deposit accounts - advertised up-front on any of our rates pages. In addition, our Savings Calculator can help you calculate your projected earnings on multiple deposits or accounts with us!
Contact Columbia Bank with any additional questions about our account services or APYs, or apply for an account today.
APR (Annual Percentage Rate)
Annual Percentage Rate (APR) is the interest rate applied for an entire year to a loan, credit card bill, or other money borrowed by a consumer. Lower APRs are typically offered to consumers with a higher credit rating, and lower credit ratings often result in higher APRs. APRs are designed to give consumers an annualized estimate for their interest payments, making it easier to compare options from different lenders.
When comparing loan or credit card options, the APR can serve as a rough estimate for how much you will end up repaying. In general, a lower APR is financially preferable. However, it is important to pay attention to the details of any agreement you sign, as full APR agreements can contain disparities that will affect the final paid amount. For example, an advertised APR is quoted as the interest applied over an entire year, but in many cases, interest is compounded monthly (meaning, depending on your payment schedule, you may end up paying interest on interest). Some loans incorporate fees like set-up charges, monthly service charges, or insurance, into the compounded amount, which could result in unanticipated interest charges as well. The simple APR (the often advertised percentage) is also known as the nominal APR. The term effective APR (EAR) refers to the nominal APR plus the added interest on any compounded fees – or the total interest amount the consumer actually ends up paying.
In the United States, the Truth in Lending Act requires lenders to disclose the nominal APR before finalizing any loan or credit card agreement with a consumer. Unfortunately, full APR agreements (and the fees included in their effective APR) are not federally regulated, meaning consumers need to pay close attention to the terms of any loan or credit card agreement they sign, and when comparing their options. Online tools, like any of Columbia Bank's many loan calculators, can be very helpful in comparing loans and determining a figure closer to your effective APR.
Columbia Bank offers competitively low APRs with no hidden fees for our customers, for personal mortgage loans and consumer loans, as well as for business loans or business debit card services. Contact Columbia Bank with any questions about our lending services or APRs!