How Does an IRA Money Market Account Work?

Types of IRAs

The individual retirement account (IRA) is a retirement plan that is either employer-provided or self-provided. There are five types of IRAs: traditional, educational, simplified employee pension, simple IRA and Roth. The traditional IRA allows you to save money without paying taxes on it until you withdraw it. The educational IRA or Coverdell ESA is a savings plan for higher education. The simplified employee pension is an employer-established plan that allows the employer to put up to 15 percent of the employee's compensation into an IRA. The simple IRA is a matching plan where the employee and employer contribute to the plan. The Roth IRA is taxed once up front, but distribution is tax free. The traditional or the the Roth are the two choices for a self-provided IRA that is saved for retirement planning.

How You Invest the Money

Whether to choose a traditional or Roth IRA depends on your income and age. Traditional IRAs are deductible, so if you need the deductions now, this may be the choice. It's also a good choice if you will have lower taxes at retirement. The Roth IRA is taxed up front, but not when you draw from the account. You can also withdraw without penalty at any time. There is an age limit of 70.5 with the traditional IRA, but there is no age limit with the Roth. Yearly contribution limits are the same for both IRAs. You can open an IRA with any financial service company such as banks, credit unions, brokers, insurance companies and mutual fund companies. Banks and credit unions are one of the easiest places to start an IRA. For those who are looking for a conservative savings plan, a money market account is the best option.

Money Market Accounts

Money market accounts are conservative and low-risk investments similar to a regular savings account. Interest earnings are moderate and build slowly over time. It usually takes as little as $100 to open an account, and you have immediate access to your money. With a tier plan, the more money you invest, the better the interest rate. If you are nearing retirement, you may want to invest money in higher yield accounts. Money markets are good for the long haul with their steady, predictable growth. With easy access, you can roll the money over into high yield investment CDs, if you choose.

Resources

• Roth vs Traditional IRA