What is IRA money market? How does it differ from other types of IRAs? How can you use it to safeguard your future financially? Let us find about all that in today’s article.
What is IRA money market?
IRA money market refers to a money market account that an investor holds within their individual retirement account. In IRA money market accounts, investors usually place one or several low-risk investment assets such as:
- Certificates of deposits
- Treasury bills
- Short-term commercial paper
As much as IRA money market accounts have low-interest rates, their return happens to be a bit higher than those from savings accounts. They also offer liquidity and stability.
If you own such an account you can operate it much like your savings or checking account, while you still get that peace of mind even during times of economic instability. The one disadvantage that you have to brace yourself for is that the returns tend to be quite low, in comparison to other assets such as equity, and most of the less-fixed income assets.
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How do IRA money market accounts work?
Investors have the option of holding their money market account in any of the many types of IRAs, including Roth and Traditional IRAs. unlike other types of money market accounts, retirement accounts are usually governed by retirement plan agreements. This means that account holders may not have the capacity to withdraw any amount of money from that account, without them paying a penalty until they’ve reached the minimum age, which in most cases is 59 ½ years. The main advantage, however, is that the account balance can be allowed to grow tax-free.
On March 26, 2020, when the world was warming up to the new state of affairs with the pandemic, the Senate took the step to unanimously approve the $2 trillion emergency stimulus package. The package allowed those affected by the global pandemic a hardship distribution worth $100,000 without incurring the usual 10% penalty that those younger than 59 ½ usually owe. The account owners were in the above case necessitated to pay the tax owed on the distributions in three years, instead of the usual one year. They were also given the option to repay their withdrawals to any IRA plan to avoid accumulating or owing to any taxes- even if the withdrawals exceed the annual contribution limits for that type of account.
Retirement money market accounts are conservative investments that can help with the diversification of an investor’s overall portfolio. Their value generally remains stable, regardless of the manner in which stocks and bond markets are performing.
At the beginning of 2020, the returns from IRA money market accounts were significantly low but were a couple of basis points ahead of the common savings accounts, and on par with regular money market accounts.
Regular savings account have a major benefit of giving their holder easy access to their money should they need it. They may, however, have limits on the number of monthly transactions that may be made.
Regular money markets may at times also have monthly transaction limits, but they may present their holders with the ability to use debit cards or checks to get a hold of their money.
The pros and cons of IRA money market accounts
Unlike stocks or bonds, the money market account funds held at the bank are FDIC insured, up to a given sum (usually $250,0000 in most cases) per depositor, per institution.
In addition to that, IRA money market accounts may be used to store the proceeds from the sale of bonds and stocks as the investor grows older and tries to establish more conservative holdings. Money market accounts have also been popular over the years for their check-writing privileges that make it significantly easier for retirees to start withdrawing their funds without any unnecessary complications.
As much IRA money market account holders get paid higher interest rates than the regular savings accounts, they have a major downside in the way that they may not earn as much money to outpace inflation. This means that the account holders’ balance can end up shrinking each year, due to the forces of inflation.
Some special considerations to make with regard to retirement investments
Most people haven’t established how much money they will need to retire. According to Bankrate, 45% of all USA citizens who earn less than $30000 annually do not put some money away in savings. Also, 21% of all Americans do not save for their retirement years, regardless of their income level. This leaves them in a very dangerous position. Not putting aside some money in savings means they won’t afford a certain lifestyle in the future. It also means that they will have to work for more years to maintain their lifestyle, which at some point will not be feasible.
Saving any amount of money makes a huge difference, provided you are using the right strategy. Also, as expert investors put it, the earlier you start saving or investing, the better. If you are already in your 30’s or 40’s, do not give up and say that it’s already too late. It is far better to have a small amount of money than nothing.
You should consider putting your money into several buckets, in the following categories:
- Short term
- Long term
All your investments in the above categories should serve different purposes.
Short term, medium-term, and long-term investment approaches
Short term investments such as savings accounts, common money market accounts, as well as specific CDs, are reliable places to store one’s funds. These investments are usually insured, and they offer low returns. Since they are easily liquidated, however, an investor can use them for their immediate cash needs like family emergencies.
For the medium-term investments (anything between two to seven years), you can consider some bonds and stocks. Investing in a brokerage account gives you exposure to the market, and can enable you to earn an impressive income when the market is favorable. Diversifying such investments also comes in handy when the market is not doing well. When you have a big financial goal such as building up a fund for college fees for your kids, you can send some of this money to a money-market account or other safe options.
A long-term investment bucket (for more than 7 years) should contain stocks, bonds, as well as other securities such as mutual funds. You can also consider opening a money market IRA. If you currently have an employer-sponsored retirement plan, take full advantage of it. It is such a great approach to earn pre-tax contributions as your employer matches some or all of your savings. The good thing is that these contributions are all tax-free. Long-term investments usually give you sufficient time to recover losses.
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That will be all for today’s article on what an IRA money market account is all about. I hope you gained some insights, and that you now know whether to invest through IRA money market accounts. If you are looking for ways to protect yourself from perilous market forces such as inflation, then you should consider my recommended alternative to IRA money market accounts. If you have more questions related to retirement investments, do not hesitate to ask them in the comments section- I’ll get back to you asap.
I wish you well,
Eric, Investor and Team Member at Gold Retired!