You probably have at least one family member with funny ideas about what constitutes a safe place to keep money. A dresser drawer, a sock under the mattress, or the ever-popular refrigerator freezer -- nobody'll ever think to look there! -- are common examples. When it comes to your investments, the stakes are larger, and finding a safe place for your money can be more pressing. When the ups and downs of the markets have got you down, annuities and money market accounts might be appealing. However, they're used for very different purposes.
Why They're Safe
Money market accounts are basically ordinary bank accounts with checking privileges. They usually require a larger initial deposit than regular accounts, and you have to keep a set minimum balance in it. In exchange, they offer a higher return than regular bank accounts. They're guaranteed by the FDIC up to a total of $250,000 per account and institution. Annuities offer higher guaranteed returns as long as the issuing company remains solvent, but they aren't FDIC-guaranteed. Your state administers an emergency fund that will protect you for up to a predetermined amount, but in practice another insurance company usually buys up the failing firm's assets and you'll never know the difference.
Using an Annuity
Annuities are intended as a place to store cash for the long term, usually for retirement. At worst you'll receive the guaranteed rate, and at best -- if the company invests well -- you can earn much more. The down side is that if you ever need it for something else your money's tied up. In the early years, annuities charge hefty surrender charges if you withdraw your money. In the later years, your gains are taxable as ordinary income at a higher rate than for capital gains. If you aren't at least 59 1/2 when you make the withdrawal, the IRS will hit you with an additional 10 percent tax penalty.
Using a Money Market Account
A money market account is exactly the opposite. Over the long haul, it won't pay enough interest to be worth your time. However, it's a useful place to park your cash for the short term while you find something better for it to do. You can move money in and out of the account at the drop of a hat, as long as you leave enough there to meet its specified minimum balance. When the markets are dropping like a brick, even a half-percent of guaranteed interest looks pretty good in comparison.
Money Market Funds
Some investors confuse money market accounts with money market funds because of the similarity in their names. Money market funds are mutual funds invested in very safe vehicles, like Treasury bills. Although you could theoretically lose money on them -- they're not FDIC-insured -- it's rare. Their benefit, in rough financial times, is that you can move money in and out of funds in the same family without paying penalties. That means you could transfer capital from your cratering equity fund into that same company's money market fund and later transfer it into other mutual funds that are performing better.
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- What Is a Money Market Account?
- What Are the Advantages & Disadvantages of Holding Your Money in a Liquid Form?
- How Should I Allocate My Mutual Funds?
- How Does a High Yield Money Market Work?
- Differences Between a Savings Account & a Money Market Account
- How Do I Find out About Money Market Accounts?