IRA Vs. Money Market

IRA Vs. Money Market

IRA Vs. Money Market

An IRA is a type of retirement account where you don't pay taxes on the money you put into the account until you withdraw it at retirement age. A money market fund is a relatively low-risk type of investment fund that typically doesn't return much money and a money market account is a type of bank savings account with a relatively high interest rate for a bank account. IRAs are usually designed for long-term, growth-oriented investing for retirement, while money market funds and accounts are good for situations where you want less risk.

How IRAs Work

IRA stands for either Individual Retirement Arrangement or Individual Retirement Account. Either way, it refers to a special kind of investment account in which you're allowed to put a certain amount of your income each year and deduct that income from your taxes.

The money in the account, which you can open with a wide range of brokerages, grows over time for you to use when you retire. You only pay taxes on the money when you withdraw it from the account, but if you withdraw it before retirement age, you'll usually have to pay an extra tax penalty.

Many people advise investors to diversify their holdings in an IRA by investing in funds that in turn invest in an assortment of stocks, bonds and other instruments in order to optimize for risk versus return. That way, you can ideally earn a good amount of money without taking unacceptable risks with your retirement money.

Money Market Funds

Money market funds, available through brokerages, are relatively liquid, low-risk investments. They typically invest in short-term debt from low-risk organizations and usually charge no fees to enter or exit, so they can be a good way to store spare cash in your brokerage account while earning some money without too much risk.

They're usually not considered a great long-term investment strategy because the return is relatively low, so most people allocating funds for the long term in an IRA or another retirement account will want to choose something a bit more growth oriented.

Money Market Accounts

Many banks also offer what are called money market accounts. These are effectively savings accounts with limitations on how many withdrawals you can make per month. Some of them also allow you to write a limited number of checks per month.

They pay higher interest than many other bank accounts, though some require you to put a minimum balance in the account. Like most bank accounts, they are insured by the Federal Deposit Insurance Corporation, so they are a low-risk place to keep your money. Naturally, like all bank accounts, they don't typically earn as much as investing in something with higher risk, such as the stock market.

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About the Author

Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.