A Comparison of Roth IRA and Money Market Accounts
As an investor, you have both short-term and long-term goals. You might use a money market account to build an emergency fund you can tap into quickly, while at the same time funding a Roth IRA you can use to see you through a comfortable retirement. Learning how to use these different accounts is a big part of being a successful investor.
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Safety
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Money market accounts are designed for investors who need absolute safety of their principal, and who cannot afford to put any of their money at risk. Money market accounts also appeal to those who need ready access to their cash, and these accounts are often used to build an emergency fund.
Roth IRA accounts, on the other hand, are designed to be long-term investments, and their safety depends on the investments they contain. A Roth IRA consisting of individual stocks carries more risk than one holding primarily bonds and fixed-income investments. That stock-heavy IRA might also provide a higher return, however, and investors must determine the proper balance of risk and reward.
Return
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The return on a money market account is typically quite low, due to the fact that the fund provides absolute safety of the principal. The return on a Roth IRA varies depending on the nature of the investments it contains. Roth IRA funds can be invested in mutual funds, individual stocks and fixed-income investments. Each of those investments have varying returns, depending on how well or poorly the overall market is doing at the time.
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Purpose
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The purpose of a money market fund is very different from that of a Roth IRA. A money market fund is typically used to fund shorter term goals, like saving up for a new car or the down payment on a home. Money market funds are also used to create emergency funds workers can tap into in the event of a job loss or unexpected expense.
The Roth IRA, on the other hand, is designed to fund retirement, and the account can build up over many decades of work. Roth IRA investors should adopt a long-term view of their investments, while money market account holders typically focus on short-term liquidity and safety.
Tax Treatment
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The tax treatment of a Roth IRA differs from that of a money market account. If the money market account is held in a taxable account, the interest income it generates is subject to ordinary income taxes. Taxpayers receive a 1099 form from the bank or mutual fund company each year detailing how much was earned, and that income must be reported to the IRS. The money earned within a Roth IRA is allowed to grow tax free, and the money taken out in retirement is not subject to Federal income tax.
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