The Enquirer

Short-Term Savings Vehicles

• Savings account: Earning only 2 percent to 4 percent in interest, they are not the most efficient way to earn on your savings.

• Money-market funds: A specialized type of mutual fund that invests in extremely short-term bonds. Usually pay better interest rates than a conventional savings account but below what you could get in certificates of deposit.

• Certificate of deposit (CD): A specialized deposit you make at a bank or other financial institution. The interest rate is usually about the same as that of short- or intermediate-term bonds, depending on the duration of the CD. Interest is paid at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest payments.

Long-Term Investing Vehicles

• Bonds: Come in various forms and are known as "fixed-income" securities because the amount of income the bond generates each year is "fixed," or set, when the bond is sold. Similar to CDs for investors, except that they are issued by the government or by corporations instead of banks.

• Stocks: A way for individuals to own parts of businesses. A share of stock represents a proportional share of ownership in a company. As the value of the company changes, the value of the share in that company rises and falls.

• Mutual funds: A way for investors to pool their money to buy stocks, bonds or anything else the fund manager decides is worthwhile. Instead of managing your money yourself, you turn over the responsibility of managing that money to a "professional."

Retirement plans

• Individual Retirement Account (IRA): One of a group of plans that allow you to put some of your income into a tax-deferred retirement fund - you won't pay taxes until you withdraw your funds. Withdrawals are taxed at regular income tax rates, not at the lower capital gains rates.

• Roth IRA: A type of retirement account that differs from the conventional IRA in that it provides no tax deduction up front on contributions. Instead, it offers total exemption from federal taxes when you cash out to pay for retirement or a first home. A Roth also can be used for certain other expenses such as education or unreimbursed medical expenses without paying a penalty (but any earnings that are withdrawn are subject to income taxes unless you are over 59 1/2).

• 401(k): Retirement savings offered by employers, named after the Internal Revenue Code section in which it is covered. Given the tax advantages and the possibility of corporate matching, the 401(k) is well worth considering.

• 403(b): The nonprofit version of a 401(k) plan. Local and state governments offer the 457 plan.

• Keogh: A special type of IRA that doubles as a pension plan for a self-employed person.

• Simplified Employee Pension (SEP) Plan: A special kind of Keogh-individual retirement account, created so small businesses could set up retirement plans that were easier to administer than normal pension plans. Both employees and the employer can contribute to a SEP.

Source: MotleyFool.com