Retirement Accounts

Investing and Financial Management.

RETIREMENT ACCOUNTS :

DEFINITION:

An investment earmarked for funding your living expenses after retirement

PROS:

Saving while young drastically reduces the amount you need to put away when older; offer great tax benefits

CONS:

Retirement saving may cut into how much can be saved for other goals; access is usually restricted until age 59½

Overview

Although growing old isn’t on most people’s wish lists, they do dream of retirement and the freedom to do what they want every day. To reach that goal, you need to save and invest for retirement. There are a wide variety of retirement accounts that can help make that dream a reality.

There are retirement accounts for:

Individuals
Employees
Businesses, even if it’s a one-person company

Generally, you may contribute to more than one type of retirement account if you meet the requirements.

A qualified retirement account receives favorable tax treatment. These tax breaks enable you to save for retirement without having taxes impede your progress.

When you’re saving on your own for retirement, individual retirement accounts (IRAs) are one of the most popular options. To make an IRA contribution, you must have earned income such as:

Wages
Salaries
Tips
Commissions
Self-employment income

Types of Accounts

Different types of financial institutions offer their own versions of money market accounts. These different forms of money market accounts may be offered through three sources:

banks
brokers
investment companies

Banks: Money Market Deposit Accounts

At many financial institutions, savings accounts have given way to money market deposit accounts. The money market deposit account through your bank gives you ready access to your money and pays a higher interest rate than traditional savings accounts. You may find that you’ll receive a higher rate of interest if you deposit a larger amount.

Brokers: Cash Management Accounts

When you’re ready to buy and sell stocks, you will need to open a brokerage account. You set up an account with a brokerage firm, which is also known as a broker-dealer. Typically, you will set up a cash management account to pay for your investments and to stash the proceeds from any you’ve sold.

Brokerage firms offer cash management accounts that earn money market interest rates. The cash management account has a number of benefits:

You can keep your savings there and may be able to earn competitive interest rates.
You can use it as a brokerage account to buy and sell investments through that firm.
You are often entitled to checking account privileges, a debit card and a line of credit.

You might pay high fees to maintain a cash management account at a brokerage firm. These fees are sometimes waived if your account is large or you meet other criteria established by the broker-dealer.

Investment Companies: Money Market Mutual Funds

Just as you and your friends throw your money in a pot to buy pizza, mutual funds pool the investments of thousands of investors. Each mutual fund has a manager or a team that invests your money in accordance with the fund’s objectives.

Almost all money market mutual funds have these features:

They invest short-term in extremely safe investments.
Your rate of return fluctuates as interest rates go up and down
Your principal is extremely safe, though it is not guaranteed by the FDIC
You have ready access to your funds.

Money market funds are viewed as a cash equivalent investment. In other words, the value of each share stays at $1 and does not go up or down as it might with other kinds of mutual funds.

What are the Differences?

With every kind of money market account, the interest rate you receive is based in part on how high or how low interest rates are. The interest rate on brokerage cash management accounts and money market mutual funds is likely to change slightly each day as new investments are bought and sold. The money market deposit account through your bank usually offers a specified interest rate for a defined period of time. For example, the interest rate through your bank may only be guaranteed for the next 90 days.

The biggest difference between a money market deposit account through your bank and one through a broker or mutual fund company is safety. The money market account through your bank is protected by the FDIC, unless you have more than $100,000 in that financial institution. Nevertheless, brokerage cash management accounts and money market mutual funds are almost as safe. The Securities Investor Protection Corporation (SIPC) protects you if the brokerage firm holding your money goes out of business. The SIPC is not, however, the equivalent of the FDIC and does not protect you if your investment goes down in value.