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Where should I put my IRA funds?
Q: Where can I put my IRA to be safe, earn the best return, and be able to get my hands on the money quickly if needed?
A: Unfortunately, you have some contradictory goals, and it won't be possible to pursue all of them at once. Your question touches on a few different topics, and walking though each of those topics might help you come to terms with what your most important goal for this money is.
Here are four things to consider:
- The main purpose for this account. The first step in deciding where to put your money is to determine what you want to accomplish. Generally speaking, if you are just starting to save money, a good place to start is by building up an emergency fund -- money that would be readily available to meet unexpected needs. Once you have an emergency fund saved up, you should think about any intermediate goals you have: Are you saving to buy a house or a car, or do you have kids to put through college? Finally, once you have a cushion against emergencies and have saved for those intermediate goals, you should put your attention toward long-term retirement savings. Ideally, you want to reach a point where you have savings programs for all these different goals going at the same time.
- The trade-off between risk and return. If you want complete safety, then you are going to be limited to guaranteed vehicles such as savings accounts. Deposits in savings accounts are guaranteed by the U.S. government (up to $250,000 per depositor at any given FDIC-insured bank), but returns these days are not very inspiring. The average rate on savings accounts is just 0.06 percent today, though you can get closer to 1 percent if you shop around.
- Liquidity. You mention wanting to be able to get your hands on your money quickly, and immediate access is one attribute of savings accounts. However, if you want to pursue a higher return, you will have to accept some restrictions on when you can access the money, and/or the possibility that the value of an investment will be down when you want to cash it in.
- The benefits and limitations of an IRA. Putting your money in an IRA will place another type of limitation on your liquidity. IRAs have tax advantages, but typically you cannot withdraw money from them until you reach retirement age, unless you are willing to pay a steep penalty. In other words, you shouldn't opt for an IRA unless this money is exclusively for long-term retirement savings.
Financial planning is largely a matter of prioritizing, and setting priorities will help guide you regarding what to do with your money.
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