- Advantages & Disadvantages of Money Market Accounts
- Traditional IRA vs. Variable Annuities
- What Is IRA Annuity & Can I Withdraw at Retirement?
- How Do Annuities Get Taxed in an IRA?
- Can You Deduct a Loss on an Annuity From Federal Income Taxes?
- Should You Spread Your Annuity Risk Over Several Insurers?
Annuities and money market accounts are investment vehicles. Each offers you an opportunity to earn investment income on deposits that you make to the financial services providers who offer the plans. Insurers are the main providers of annuities, while most money market accounts are offered by banks.
With an annuity, you make a payment or series of payments to the issuer, which in return provides you with regular payments beginning on a specified date and continuing for either a defined period or for the remainder of your life. Most annuities allow tax-deferred growth on earnings, so investors do not have to pay taxes on earnings until they receive them as income. However, annuities are taxed as regular income rather than as capital gains, the tax rate for which is typically lower..
Money Market Account Basics
Money market accounts are deposit accounts. They are conservative investments because they typically are tied to fixed-income investments, such as U.S. Treasurys. However, they offer higher rates of return than regular savings accounts. You typically must maintain a higher minimum balance than that required for most savings accounts. You can write checks and make withdrawals from a money market account, but banks put limits on the frequency with which you can take money from such accounts.
The risk associated with annuities varies. In the case of a fixed annuity, an insurer guarantees you will receive a specific periodic payment for the length of the annuity. An indexed annuity provides returns based on the performance of a specified index, such as the S&P; 500. Indexed annuities also guarantee a minimum return, according to the U.S. Securities and Exchange Commission. Variable annuities allow you to choose how you invest your money, but they come with the risk that the investments could sour and produce little income. Money market accounts carry little risk because most are insured by the FDIC up to $250,000.
Term and Penalties
Investors typically use an annuity for long-term financial planning, such as for retirement, while money market accounts are linked exclusively to neither short-term nor long-term investing. Annuities and money market accounts both carry potential penalties. Early withdrawals of your funds from an annuity likely will lead to a surrender charge from the provider and tax penalties from the IRS. If your balance drops below the minimum of a money market account or you make too many withdrawals in a month, your bank may charge you a fee or close your account.