The different kinds of financial accounts and products can be confusing. There are several varieties of IRA accounts, for example. Fortunately, most of them are fairly straightforward once you know what to look for. Understanding what each account type is used for is the first step toward having a solid financial plan.
An IRA, or Individual Retirement Account, is a way to save money for retirement. An IRA offers a way to save money on taxes by allowing all funds inside the account to grow tax-deferred.
Money Market Basics
A money market account is an interest-bearing account like a savings account. However, the interest rates on money market accounts can vary depending upon market conditions. In addition, many financial institutions have a higher minimum deposit for money markets.
Money Market For Retirement
A money market account can be used to save money for retirement. However, any interest paid on the money in the money market is taxable. That means you must either take money out of your retirement savings to pay the taxes, or pay for the taxes out of other funds. Either way, the taxes can be a significant drag on your retirement savings, especially when they start to get larger later in life. On the other hand, unlike an IRA account, there is no penalty for withdrawing money from a money market account before age 59 1/2.
Money Market in an IRA
A money market is one of many investment options allowed inside of an IRA account. Many people use their IRAs to invest in stocks, bonds or mutual funds, but there is no requirement to do so. A money market account offers stability over other investment options while still earning a higher interest rate than a regular savings account. Once inside an IRA account, however, all rules and regulations for IRAs apply, including penalties for withdrawals before age 59 1/2.
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