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My mother has recently won a lawsuit against the state, and she is set to receive about $35-40k after lawyer/court fees.  Problem is, she has no clue how she should manage it.  She says that she doesn’t want to blow the money, but on the other hand she doesn’t want to stash it away for years. She is looking for something that will allow her to maximize the growth over a short period (approximately 2 years) while having the convenience of being able to touch the money in times of emergency. Would you suggest placing the money into a Money Market Account or a high yield savings account? – Dosh, Delaware

Dosh,
Thanks for asking another question. If your mother is looking to safely maximize her return over the next two years, she should avoid equities. Unfortunately, many high yield savings accounts are also not offering the same 5% interest rates they were last summer. Does your mother need access to all $35-40k at once? If she has some flexibility with this, I would recommend taking a look at CDs. In the current financial landscape, certificates of deposit offer relatively attractive rates with the bonus of being FDIC insured. One caveat to CDs is that your mother will pay an early withdrawal penalty if she needs to access the money before the maturity dates of the CDs.

If your mother wants immediate access in case of emergency for all of her money, I would recommend creating an online savings account with a provider like Emigrant Direct or ING Direct. Right now those two banks offer annual percentage yields of 2.75% and 3.00% respectively. A note of caution: your mother should not keep more than $100,000 in a single bank account, as the FDIC only insures amounts up to $100,000. If a bank were to have liquidity problems and your mother had $150,000 in her account, she could potentially lose $50,000.

I recently acquired a little over a thousand dollars. I’ve been constantly hearing about Roth IRA’s and how they’re a really good option. What’s the difference between putting your money there versus putting it in a savings account? Should I even put my money in a Roth IRA? Thanks for your help. – Ryan, 22, Potomac, MD

Ryan,
Roth IRAs offer an attractive investment opportunity. The major benefit of Roth IRAs is that they offer an investor tax-free growth and withdrawals for all the contributions to, and gains in, the account. The major drawback is that every dollar contributed to a Roth IRA is after-tax and contributions are not tax deductible. The general rule is that if an investor is in a low tax bracket, a Roth IRA makes sense because there is the potential that in the future the investor will be in a higher tax bracket. On the opposite end, if a person is in a high tax bracket, they are probably better off investing in a traditional IRA because their contributions will reduce their taxable income.

There are a few differences between a Roth IRA and a savings account. With a Roth IRA, an investor can only contribute up to $5,000 in 2008 whereas savings accounts have no limit. In your situation, you have $1,000 so this presumably is not an issue. The major difference between the two is that the Roth IRA will offer you tax-free growth of your money, while you will get taxed on all interest earned from a savings account. The length of time you plan on not needing to access the $1,000 is the most important factor in your decision. Early non-qualified distributions (See IRS Publication 590 for all of the specifics) are taxed at 10%. Therefore, if you are absolutely sure that you will not need the $1,000 in the near future, I would recommend putting it into a Roth IRA. Otherwise, you are better off putting it into the savings account.