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Which accounts should I deposit my retirement income into?

Q: I am retired, and my retirement income consists of $20,000 a year from a pension, plus $2,000 a month I take out of an IRA as a required minimum distribution. I've been transferring that $2,000 into a checking account. Is this the best kind of account for that?

A: The answer to that depends a great deal on how you are using the money. The following are three possibilities, including high interest savings accounts, along with some thoughts on when they might be the right fit and what you should look for in each case.

Checking account

If you find that you are depending on both your pension and your $2,000 a month IRA distribution to meet immediate expenses, then continuing to have that money flow into a checking account is probably a good choice. In that case, the main consideration is to look for a checking account that does not charge a monthly maintenance fee.

While most checking accounts these days do charge a monthly fee, there are still some that do not, especially if you consider an online checking account. With the average of these fees totaling more than $150 a year, it is well worth looking for one of the checking accounts that does not charge a monthly fee.

Some banks will waive that monthly fee if you maintain a certain minimum balance or have regular direct deposits into the account. Setting up your IRA to make distributions directly to the checking account might satisfy the latter requirement.

Savings account

If you find that you do not immediately need all the retirement income you have coming in, it may make sense to keep some of it in a savings account rather than a checking account. This should allow you to earn more interest.

The best savings accounts for interest rates these days pay around 1 percent in annual interest. That may not sound very exciting, but it is several times the national average and is certainly better than having money sitting idly in a checking account earning little or no interest.

You might even consider putting some of your deposits in a CD to earn higher interest. Just be sure to consider the early withdrawal penalty, CD rates and your possible need for the money before you take this step.

Growth account

Finally, if you find money building up in your deposit accounts over time, it might even be appropriate for you to invest some portion of those savings in a growth account. This could be either a diversified stock portfolio or a mix of stocks and bonds. The idea is that if your immediate income needs are taken care of, you might want to invest in growth to protect against inflation.

Besides looking for diversification, you should also be searching for a reputable investment firm with competitive fees (say, an expense ratio of 1 percent or less for a stock fund, and no sales charges).

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