What is the Difference Between IRA, CD and Money Market Fund?
Investing your money smartly is essential to building a substantial savings. The savings can be used for life expenses, but also for retirement. Certificates of deposit (CDs), money market funds (MMF) and individual retirement accounts (IRAs) are some types of investing options and each have their own advantages and disadvantages.
Other People Are Reading
-
Investing in a CD
-
A CD is a savings option offered by financial institutions. Traditionally, money is deposited into an account that earns interest on the full amount for the predesignated amount of time, depending on the CD. There are many varieties of CDs, however, including variable rates and long-term CDs that function differently from the traditional CD.
Money Market Fund
-
MMFs are essentially mutual funds that are legally required to invest in highly liquid and low-risk securities. These include investments into government securities, savings bonds, CDs and commercial papers of companies. The benefit that money market has over CDs is the ability to withdraw funds at will.
-
Traditional IRA
-
IRAs, while serving as a savings tool, is primarily used as a retirement account. Of the two types, traditional IRA offers "tax-deductible investments," meaning you can deduct the amount of money you invest into IRA and delay paying taxes on the money until you withdraw the money during your retirement. You would pay taxes then, but presumably, you would be in a lower tax bracket at that age than you would at this time.
Roth IRA
-
The other option available for IRAs is called the Roth IRA. This is a tax-exempt IRA, meaning that while you pay taxes on the income you deposit, you need not pay taxes on the withdrawal or the interest your investment accrued if you withdraw past the age of 59 1/2 on an account that has existed for a minimum of five years. There is an early withdrawal fee, however.
The Choice is Yours
-
For short-term investments that double as a savings accounts, a CD or MMF is the best route. For long-term retirement savings accounts, the IRA, especially the Roth IRA, are both worthy considerations.
-
