My husband and I have saved six months of income and want to invest some of it in either a money market or a Roth Individual Retirement Account (IRA). However, I don’t know the difference between the two. The end goal I want to accomplish is having money invested into something that we can leave alone for 10-20 years, will grow and in the future can take out without the hassle of penalties. Can you explain the difference and offer advice as to which would be best to invest in?
FPA member Eric Reid, CFP®, President of Servant Advisors, Inc., said the following:
“A money market is very similar to a savings account, usually paying a little higher interest rate. There can be restrictions on money markets such as deposit minimums, withdrawal restrictions, and others. It might help to think of the money market as an investment (as it is) that pays an interest rate.
“A Roth IRA is a type of account — while a money market is an investment — that is created under the Internal Revenue Service Tax Code. The Roth IRA allows individuals to save for retirement. All of the earnings inside a Roth IRA account are tax-free provided the account holder meets certain conditions:
- The account holder needs to obtain the age of 59 ½.
- The account holder needs to have the Roth IRA open for at least five years prior to taking out earnings.
“If the account holder does not meet those requirements, then any earnings are taxed and a 10 percent tax penalty applies.
“There are a lot of exceptions to taking money out of the Roth IRA before a person turns 59 ½. Your best bet is to check with your bank or tax adviser as they can provide you with all of the details on when you can take money out of the Roth IRA without paying a tax penalty.
"Based on your question and the statements you have made, I would suggest you look at a money market.”