The Internal Revenue Service affords special tax treatment to certain kinds of tax-qualified accounts. You can open a money market account with either qualified or non-qualified funds. Both qualified and non-qualified accounts are subject to banking industry withdrawal restrictions, but the former are also affected by federal tax rules that limit accessibility.
Qualified accounts are funded with pre-tax earnings and grow on a tax-deferred basis. Funds inside these accounts grow more quickly than those in taxable accounts because you earn interest on your interest before any of your earnings are lost to taxes. Retirement accounts such as 401(k), 403(b) and Individual Retirement Arrangements all are qualified accounts. Generally, you must begin withdrawing money from your IRAs by April 1 of the year following the year that you turn 70½. The size of these withdrawals depends on your age and actuarial tables that record average life expectancy. You pay ordinary income tax on withdrawals -- and you pay tax penalties if you fail to take your required distributions.
Money Market Accounts
Both qualified and non-qualified money market accounts are savings accounts available through banks and credit unions. Under federal banking Regulation D, withdrawals from these accounts involving checks, debit cards and ATMs are limited to six per month; however, you can make unlimited in-person withdrawals. For qualified accounts, you have to pay ordinary state and federal income tax on your account withdrawals . You also pay a 10 percent tax penalty if you make a withdrawal prior to reaching the age of 59 1/2. The IRS waives the penalty fee if you make a withdrawal after becoming disabled or if you are the pay-on-death beneficiary receiving proceeds from a qualified account.
The Federal Deposit Insurance Corporation guarantees money held in bank accounts, while funds at credit unions are insured by the National Credit Union Administration. These entities guarantee deposits in accounts such as money markets for up to $250,000 per account holder. Funds held in qualified accounts such as IRAs are insured separately. Therefore, you could have $500,000 of insured money market funds at one bank if you deposited half in a qualified account and the rest in a non-qualified account.
Money Market Funds
Some investors confuse money market accounts with money market funds. The latter are mutual funds that contain short-term securities such as treasury bonds and commercial paper. Generally, shares of money market funds remain steady with a net asset value of $1 per share. However, there are no principal guarantees. For this reason, Congress passed the Garn-St Germain Act in 1982 that enables banks to offer money market accounts as a principal protected alternative to money market funds. As with money market accounts, you can buy money market funds with qualified or non-qualified money.
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