What Is the Difference Between a Roth IRA & Money Market?
When it comes to investing, you have two decisions to make: what to invest in and how to do it. In this case, the "what" is a money market while the "how" is the Roth IRA. These two pieces work together to form a successful investment strategy.
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Investing Basics
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Investors have a number of investment options from which to choose (the "whats"), including money market and other mutual funds, stocks, bonds and currencies, among other things. These are the things that you can buy or sell and use to make -- or lose -- money. When you decide to invest, you open an account to hold your money and your investments. Some account types, such as a 401k plans and IRAs, have favorable tax treatment. Other account types are ordinary holding accounts. These are the "hows," also known as investment vehicles.
Roth IRA: An Investment Vehicle
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The Roth IRA is an account type. Money and assets held in a Roth IRA receive favorable tax treatment from the government. In this case, you can contribute money to the account with after-tax funds, and withdraw the contributions -- and the earnings on those contributions -- tax-free in retirement. Deposits and withdrawals to a Roth IRA have specific rules based on your age and the age of the account laid out by the IRS. Once your money is in the Roth IRA, you can invest it in almost anything: stocks, bonds and even money market.
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Money Market: An Investment Option
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"Money market" refers to one of two things: a bank money market savings account or a money market mutual fund. In both cases, you deposit your savings into an account and earn interest on the balance. Money market accounts at a bank are savings accounts that pay a higher rate than the standard accounts, typically with higher minimum deposit requirements. A money market mutual fund pools shareholder's money to invest in U.S. Treasury bonds and other safe investments. It also pays interest at a higher rate than standard savings accounts, but lower than most other mutual funds. Either money market is an investment option that can be held within a Roth IRA.
The Overlap: Using Money Market in a Roth IRA
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If you categorize your money market savings account or mutual fund account as a Roth IRA, you can withdraw all the interest you earn in retirement without paying taxes on it. You must follow the rules for Roth IRAs to take advantage of this benefit, but the savings can add up. If you earn just $1,000 in interest in a standard taxable account, you could easily lose several hundred dollars to taxes. In a Roth IRA, you can keep it all.
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