Money Market IRA: A Safe Alternative

If riding the stock market wave isn’t your cup of tea, consider linking your IRA to a money market IRA account. While the returns may not be as extreme, neither will the losses, allowing you to plan and budget for your golden years more effectively.

Sometimes investors confuse the difference between the actual IRA and the money saving vehicle within the IRA. IRA funds grow based on a variety of factors including bonds, securities, CDs and money markets. You or your employer can identify which savings vehicle is the best fit for his or her IRA.

When the market is having a bi-polar moment, sticking with a money market IRA can be your best bet. The IRA interest is paid into the money market, which is not taxed until withdrawn. The investor can grow retirement funds through the compounded interest generated over the life of the account.

What is an IRA?

An individual retirement savings account (IRA) is a personal savings account that allows the individual to allot funds to be used for retirement. Unlike a regular savings account, this income tax deductible account has specific rules and regulations: 

  • Investments can be made up to the allowable amounts under tax law—up to $5,000 a year for individuals or $6,000 annually for those age 50 or older
  • Income tax deduction is provided on contributions and earnings made during that specific year
  • Early withdrawals, otherwise known as distributions, are subject to tax and early withdrawal penalty fees
  • An early withdrawal is considered withdrawing money before age 59 ½
  • Unlike investing in the stock market; an IRA is FDIC insured
  • Many states have laws that protect IRA funds from creditor seizure

Types of IRAs

One size doesn’t fit all in the world of IRAs. Some investors get started saving early for retirement and may find one IRA type more attractive than another. Self employed and parents saving for their child’s education may find a different IRA more advantageous. 

Currently, five IRA types exist:

  • Traditional: all earnings and contributions have no tax impact and withdrawals at retirement age are taxed as income
  • SEP: employer (or self employed) directed IRA with contributions being made toward a traditional IRA in the employee’s name instead of a corporate pension fund
  • Simple: employee pension plan similar to a 401(k) where the employee and employer both make contributions
  • Self-directed: allows the account holder to make investments for the retirement plan
  • Roth: all transactions are tax-free (including withdrawals) with contributions made with after-tax assets

Money Market IRA Pros and Cons

While a money market IRA is a safe and steady investment vehicle for just about anyone, those close to retirement benefit most from this investment option. The investment isn’t as risky as IRAs rooted in bonds and securities and retirement funds continue to flourish.

Although the money market IRA can work for anyone, over time nearly all investments will outperform the money market account. Investors in their 20s, 30s and 40s may want to still consider other savings avenues because they have more time to recover from dips in the market. 

An IRA is always one of the best ways to save for retirement thanks to the tax advantages. Overall investors end up earning 8 percent more on an IRA than a taxable account, which can result in a several thousand dollar difference.