While you know that creating a savings plan is important, you might still find yourself confused as to which option is the best. It can be difficult when you are looking to choose between an IRA, CD, and Money Market account. Without knowing a little about what each account type offers or doesn’t offer, the task becomes considerably more difficult. Here is some information to help you understand an IRA, CDs, and Money Market accounts better so that you can make an informed choice about which option will work for you.
- IRA – Individual Retirement Account. An IRA account is available in both a traditional and ROTH version. Each allows you to create a savings account for your retirement future and offers various tax advantages. An IRA is a great option for long-term and retirement savings. The funds are secure, there are a variety of investment options, and you can access it without a fee at retirement age. The downfalls are that if you need access to the money before retirement you will have to pay fees and penalties for early withdrawal.
- CD – Certificate of Deposit. A CD is a savings plan for a specified amount of time and earns a specific interest rate. The advantage to a CD is that it is one of the most secure ways to save money that you want to lock up or won’t need access to for months of years. The CD will earn a slightly higher interest rate than a traditional savings account. They are secured savings accounts and are backed by the FDIC. The disadvantage to a CD is that the money is locked in for the term of the CD. This means that you can’t access the money without paying a penalty, but also means that you can’t change the interest rate either. If savings account interest rates increase you will still be locked into the rate the CD was originally assigned.
- Money Market – Dedicated Savings Account. A money market account is similar to a traditional savings account in that you can determine how much and when to deposit funds. You also have access to the funds as you need them. Money market accounts that have larger balances are designed to allow banks to use your funds to make more money. For this privilege, the bank pays you a slightly higher interest rate. The disadvantages are that you are limited to the number of transactions you can have each month and there is usually a minimum balance requirement.
Each type of account has its own advantages and disadvantages. The most important thing is to decide which of those advantages best meets the options you are looking for. When looking to choose between an IRA, CD, and Money Market, determine if you are ready to invest long or short term, how important having access to the money is, and whether the difference in the interest rate is substantial enough. Whichever version of savings you decide to go with you’ll realize many advantages by being prepared for the future or sudden emergencies.