About IRA Money Market Accounts
Most financial advisers say it's never too late to save for retirement,ad IRAs are a great way to save toward your retirement goals. An IRA account provides tax-differed growth as long as funds remain in the account. If funds are withdrawn, they are taxed at the applicable rate. When you put money into an IRA, the contribution reduces your gross income and will save you money on federal income tax.
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Function
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An IRA account is used to save money for retirement expenses. In order to encourage people to save for retirement, Congress has given the IRA account special tax status which allows for money within the IRA account to grow tax differed. A money market account can be used as the investment method inside of an IRA account which allows for steady, low risk growth without paying tax on the interest.
Misconceptions
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Many people confuse the difference between the tax advantaged IRA and the vehicle used within that account. In the case of an IRA Money Market Account, the IRA is the tax-deferred account. However, the savings mechanism inside the IRA account is a money market account. The term "IRA" confers tax-exempt status on the money market account, which does the savings work.
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Benefits
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The benefit of a IRA Money Market Account comes from a combination of its tax advantages and its steady safe interest rate. As an IRA, the interest paid on the money inside the IRA Money Market is not taxed until it is withdrawn. The money market account provides a way to grow retirement dollars by providing compounding interest over the life of the account. The money market account provides a safe way to invest for those close to retirement who don't want a risky investment.
Warning
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Over long periods of time, almost all investments out perform money market accounts. Even worse, the interest rate paid on most money market accounts will barely outpace the rate of inflation.
Time Frame
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A money-market based IRA account has the same tax rules as any other IRA account. Funds may not be withdrawn without penalty until the account owner reaches 59 1/2 and must have minimum amounts withdrawn every year after the account owner reaches 70 1/2. For account holders older than 59 1/2, the rules of the money market account may only allow a certain number of withdrawals per month.
Theories/Speculation
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Most financial advisers say the farther away from retirement you are, the more risk you should accept to get the most return for your dollar. This would make a money market a poor choice for younger workers a long way from retirement. However, as a person nears retirement, it is important to make the overall composition of retirement investments more conservative. A money market account does this nicely.
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