are there savings plans with Compound interest that remains available/liquid?

Question

So I've heard about 401K, Roth IRA, IRAs, I don't truly understand them all but I know they work on compound interest and that there are heavy tax penalties for taking the money out before you are 55/59 years old. Are there any type of savings plans that you can invest in that remain liquid? Meaning you could get to that money without paying heavy fees? I'd like to take advantage of compound interest but I hate the idea of losing a lot of that money by taking out money early - or even by paying taxes on it after 55/59 years old..... is there any way to avoid paying huge taxes, save with compound interest, and still have the savings be a liquid asset?

Answer 1

I think you are a little bit confused.
401k and IRAs are simply types of investment accounts. There are specific tax laws that apply to each. With those accounts you can invest in virtually any way you like. Stocks, mutual funds, etc. Compound interest is something different. Compound interest refers to the fact that you will earn interest on an account and it's balance will go up. You will then earn interest on that new higher balance which means you are earning more interest. As time goes on, you earn more and more. This sort of principle applies to any investment with a fixed rate of return such as a savings account or a money market account. You do not need to open an 401k or IRA to take advantage of this principle. ( Although if you are saving for retirement you would be foolish not to take advantage of these types of accounts )
Not all savings accounts are created equal. The savings account at your local bank will most likley pay 1% or less in interest.
Something like www.ingdirect.com will pay much better ( around 4.5% right now ).
You can also open indiviual mutual fund accounts and invest your own money. This sort of "general" investment account does not have any tax penalty if you take money out before you retire ( although you will need to pay capital gains tax on the money you make there ).

I reccomend going to the following website to read up on personal finance and investing. IT's simple and puts things in laymens terms.

www.fool.com

It's a funny name but it's a real website. check it out.

Answer 2

First off, lets get you clear on some major issues that you are not understanding.
1. IRAs, 401k, Roth etc. do not in & of themselves work on compound interest. It is what they hold IN the accounts that determine that. Like a money market or fixed rate investment within the account, is what even gives an interest rate.

2. Retirement penalty kicks in at ages below 59 1/2.

3. The only thing that gives interest are things like savings accounts, checking accounts, CDs, money market, savings bonds, investment bonds. Stocks & mutual funds, which are very common in retirement plans, do not pay interest, they pay dividends.

4. So the answer is yes, you can have compound interest in a savings account, interest checking, money market, bonds, or CDs. Compounding just means that it pays interest at given times & that interest also can earn interest.

Just keep in mind that you may still have pennalties for minimal balances & early closing for some types of accounts.

Answer 3

Try going to your local bank and asking for a money market account. Usually there's a minimum balance of about 5-10k, but it works just like a checking account. In my area, the current rate pays about 5.5%. Not the best rate, mind you, but it's better than a regular savings. Just make sure you keep your balance above the minimum.

Answer 4

Your account starts to calculate interest at the end of the day when you put the $100 in. The interest is calculated and compounded every evening thereafter based on the amount of money in the account at the end of the day. You don't have to add money to the account. However, there may be a minimum balance required to avoid service fees. The bank can tell you the minimum required to avoid fees.