Many businesses no longer pay pensions or retirement pay to their employees. Employees are assuming responsibility for their own expenses during their retirement years by saving in an IRA, or Individual Retirement Account. Rather than paying pensions to employees, many employers match the savings that employees have deducted from their paychecks, or they may pay a percentage of the savings that is added to the IRA. The U.S. federal government offers tax advantages to those who save for retirement in this way, but there are limits as to how much can be saved in one of these accounts. This is because taxes are deferred until retirement age, so the government limits how much individuals may have in tax deferred funds.
A money market IRA is considered to be a safe alternative to mutual funds. If there is an economic downturn, mutual funds can cause an investor to lose a lot of capital when stock prices fall drastically. Although financial advisors generally suggest that investors leave their funds in place until the economy bounces back, many people panic when their retirement savings are drastically reduced. They then withdraw their money from these funds and only receive a small portion of the amount that they invested.
Money market accounts are usually opened through a bank, credit union, or other financial institution. Investments are also made with funds in the money market, but risk is not as high as with mutual funds, so there is less chance of losing retirement savings. Money managers attempt to keep the share price of the money market constant, so these accounts usually keep their value, whereas mutual funds can cause large losses of principal. The safer investments of money market IRAs invest in savings bonds, government t-bills, certificates of deposit, and other conservative investments.
These safer investments have less risk, and they pay a guaranteed rate of return in interest rates rather than capital gains from mutual funds. Current rates are very low at about .96 percent. Savings accounts at a bank are around .90 percent, not much less than money market rates. Other banks and financial institutions may offer higher interest rates up to 1.25 percent, but they may have minimum deposit requirements up to $25,000 or more.
Almost any bank or financial institution can open a money market IRA for an individual, but there are usually minimum deposit requirements. This means that the person must have saved a substantial amount for retirement before shifting funds into a money market within their IRA. It is important to check to see if a bank or financial institution charges a monthly fee, as many banks do. These can be eight or ten dollars per month, adding up to about $120 in annual fees. Many people do not want to pay this amount to the bank when they are expecting returns for their money, not fees for keeping it. It is possible to earn higher interest rates when higher amounts of money are invested in a money market account. Amounts over $100,000 may pay up to 1.4 percent, which is still a very low rate for investing so much money.
A money market IRA is a safe way for those saving for retirement to ensure that their savings are still available when they need it. It is easy to take money out of a money market account, and cash is readily available by using a check or account transfer to move money out of the money market account into a checking account in case of an emergency. Money market IRAs are the choice for those nearing retirement age who cannot risk losing their savings in mutual funds. They allow the owner to have the peace of mind that the funds will be available upon retirement.