Should you open an IRA money market account?
68An IRA money market account is one of the many IRA accounts which you can have to save for retirement as well as save on taxes. Most financial experts agree that it is never to late too start savings for your retirement and it is a fact that an IRA account is one of the best way to save for retirement with an added advantage of tax savings.
An IRA money market account is different from any other IRA account in the sense that the money in this account is invested in money market instruments instead of stocks and other high risk securities. A lot of people are scared by the name of IRA accounts since they think that IRA accounts put all your money in stocks, bonds or similar securities which are high risk. And they do not want to keep their savings for retirement in a risky investment avenues. Money market instruments invest in very low risk instruments which are mostly owned by the government like United States Treasury bills and certificates of deposit (CDs). And as you may have guessed, these are low risk and therefore low interest yielding accounts.
The main advantage of IRA money market account is that the interest you receive on this account is tax deffered since it is an IRA account. Only in case of a premature withdrawal, you will need to pay the tax on interest amount. There is no tax to be paid on the interest until the withdrawal is made which is a huge advantage apart from being a saving for your retirement. The interest is compounded therefore your savings keep on increasing over the life time of your account thus giving you a huge sum of money at your retirement. Another added advantage of IRA money market accounts is that these accounts are insured by FDIC like any other bank account.
The time frame for an IRA money market account is similar to other IRA accounts. A persoan cannot withdraw the money without paying penalty before age of 59.5 years. After that a minimum amount has to be withdrawn each year until the person reaches 70.5 years.
The disadvantage of money market IRA accounts is that the interest rate is pretty low and this is a major disadvantage in my opinion. Most of the time, the time frame for your retirement would be in tens of years and any other investment avenue will give you much better return on investment even if it is a very high risk security. In the long run, most of the other IRA accounts which invest in stocks, bonds etc will give much better returns than money market accounts of IRA. Therefore it doesn't make much sense for younger or middle aged people to start putting in their savings for retirement in IRA money market account. For older people who are nearing retirement, it is a great way to save as well as avoid tax since they can't afford to invest in risky instruments.
So, if you are one of those who have age on your side, you are better off using other high or medium level risky investments to save for your retirement while stll saving on tax. If you are nearing retirement this is a great option. But before you buy, it is always better to consult your tax adviser or any other financial consultant to make sure IRA money market account is the best option for your need.
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