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Money market account advantages and disadvantages
Some money market accounts have certain features that you won’t find in a savings account. Here’s a look at some of the key advantages and disadvantages of money market accounts.
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Frequently Asked QuestionsWhat's the difference between a traditional IRA and a Roth IRA?
A Roth IRA is a retirement savings account that provides federally tax-free growth and withdrawals once the account has been open for 5 years and you are 59½ years of age. Contributions can be withdrawn at any time, tax and penalty-free. A traditional IRA is a retirement savings account that provides federally tax-deferred growth. Withdrawals after the age of 59½ are taxed at your tax rate at that time. Contributions may be tax-deductible. Withdrawals before the age of 59½ are subject to taxes and a 10% federal penalty. Anyone with earned income under the age of 70½ can contribute to a traditional IRA. Roth IRAs are restricted to those who do not exceed certain modified adjusted gross income limits. Traditional IRA contributions may be tax-deductible. Roth IRA contributions cannot be deducted. (Subject to certain rules. Consult your tax advisor.)What is a rollover IRA and why should I consider opening one?
A rollover IRA is a retirement savings account specifically designed to receive transfers from a previous employer-sponsored retirement plan, such as a 401(k) or 403(b). Benefits include: • Retention of tax-deferred status of your retirement savings • Consolidation of your retirement accounts for simplified management and greater control • A wider variety of investment choices, letting you find investments that more closely fit your financial goals and style • Opportunity for your retirement savings to continue growing (Subject to certain rules. Consult your tax advisor.)How much can I contribute to an IRA account annually?
$5,500 if you are under age 50, $6,500 if you are 50 or older. (Subject to certain rules. Consult your tax advisor.)
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How a Retirement Money Market Account Works
A retirement money market account may be held within a Roth IRA, traditional IRA, rollover IRA, 401(k), or other retirement account. Unlike a regular money market account, a retirement money market account is governed by a retirement plan agreement. That means, for example, that the account holder may not be able to withdraw money from the account without paying a penalty until they have reached a minimum age, such as 59½. As a benefit, however, the account balance may be allowed to grow tax free.
A retirement money market account is a conservative investment that may be used as part of a diversification strategy within an overall retirement portfolio. Its value remains stable regardless of how the stock or bond markets perform.
Regular savings accounts, with their lower returns, give the account holder the advantage of easier access to money should the saver need it, though there may be limits on how many monthly transactions may be made. Regular money market accounts may also have monthly transaction limits, but may offer the ability to use debit cards or checks to access the money.
No Bank PenaltyThere are no early withdrawal penalties charged by the Bank on this account, however, money market account withdrawal limits apply3 and you may be subject to IRA tax penalties2.
IRA Contribution Limits, Deadlines Eligibility
Make sure you’re on top of your IRA. Read over IRA contribution limits, deadlines and eligibility here.
Time and Liquidity
Your investment time frame plays an important role in choosing appropriate investments.
An IRA account intentionally spans your lifetime so you can accumulate funds to supplement retirement income. You deposit to it each year until you retire, and then you take money out of it for the next 20 to 25 years or until your death. If you withdraw from an IRA before you reach age 59½, the IRS slaps a 10 percent penalty on your withdrawal. All these features define an IRA as a long-term investment account.
In contrast, money markets are liquid savings accounts that often include check-writing privileges. While they can average higher returns than regular savings accounts, they are considered low-risk accounts that do not have the growth potential of most stocks and mutual funds. Many investors use money markets to hold emergency cash, generally considered a short-term investment objective.
Read More: Importance of the Money Market
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*This is the annual rate of return that you expect from your savings and investments during retirement. This calculation assumes a 0–10% annual rate of return (depending on your selection) on your savings. It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. Depending on the interest rate, you may reach your savings goal sooner or later than this calculation.
Types of Money Market Accounts
You can establish two types of IRAs and choose between two types of money markets. A bank money market account provides Federal Deposit Insurance Corp. (FDIC) insurance and generally pays higher interest rates that than regular savings accounts. Investment companies offer money market mutual funds that are not covered by FDIC.
Money market funds invest in low-risk securities such as certificates of deposit and other short-term, liquid assets. They usually yield a higher return than a money market deposit account and allow you easy access to your cash. Money fund managers strive to maintain a dollar-for-dollar value on your deposit, but mutual funds carry no guarantees – even for money market investments.
Read More: Types of Money Market Instruments
Most people don't know how much money they'll need for their retirement. This puts them in a perilous position. Not saving means not being able to afford a certain lifestyle. And it also means you'll have to work longer, which may not be feasible.
Saving any money, no matter how small, makes a big difference, as long as you have the right strategy. The earlier you start, the better. If you're in your 30s or 40s, don't think it's too late. It's better to have something socked away than nothing at all. Consider putting money into different buckets—one for the short term, one for the medium term, and one for the long term—all of which can serve a different purpose.
Short-term investments such as savings accounts, regular money market accounts, and certain CDs are great places to store your cash. As noted above, these investment vehicles are insured and provide low returns. But because they are easily liquidated, the account holder can rely on them for immediate needs, such as a car or a family emergency.
Investments that may be good for the medium term, anywhere between two to seven years, include stocks and bonds. By investing in a brokerage account, for example, you can get exposure to the market, giving you enough time to generate significant returns when the market is good. Diversifying these investments helps protect you when the market is not good. And when a big goal is approaching, such as college for children or your own retirement, also shelter some of this money in money-market accounts and similar safer harbors.
Your long-term investment bucket—for a horizon of more than seven years—should also include stocks, bonds, and other securities like mutual funds. You should also consider opening up an IRA, a 401(k), or a Roth IRA, in which you can hold a retirement money market account. If you have an employer-sponsored plan, don’t overlook it. It’s a great way to earn pre-tax contributions, and your employer may match part or all of your savings—all of which are tax-free. Long-term investments give you more time to recover from market losses.