What can IRA money market accounts earn today?

Q: If I put $150,000 in an IRA money market account, how much interest would I make over the course of a year? What penalties are there for early withdrawal, and what happens with penalties and interest when I pay bills with the IRA money market account?

A: Since there are a few facets to this question, the answer is broken down into the following parts:

  1. How much interest can you expect to earn? The FDIC recently reported that the average money market account nationally was paying an annual interest rate of just 0.09 percent. This would produce just $135 a year in interest on $150,000. Since you have more than $100,000 to deposit, it would be considered a jumbo deposit, which often qualifies for more interest. According to the FDIC, the average money market rate for jumbo deposits was 0.13 percent, which would produce $195 in yearly interest on $150,000. However, if you don't want to settle for the average, MoneyRates.com recently listed several money market accounts paying 0.80 percent or more. An interest rate of 0.80 percent would produce $1,200 in annual interest on $150,000, or more than six times what the average jumbo account would produce.
  2. What penalties are there for early withdrawal? It is important to make a distinction here between the IRA and the money market account. Money market accounts typically limit the number of transactions you can have per month, but your money is available at any time without penalty. In an IRA, if you withdraw money before age 59 1/2, you will typically have to pay a 10 percent penalty on top of any ordinary tax liability.
  3. What happens when I pay bills with an IRA money market account? If you are under 59 1/2, you should rule this out altogether because of the tax penalty. Even if you are over 59 1/2, the transaction limit would mean that a money market account might not be the best vehicle for paying bills.

People often seem to lose sight of the distinction between an IRA and the underlying investments in that IRA. The IRA itself is money you've committed to leave alone until you reach retirement age, in exchange for certain tax advantages. That money, in turn, can be invested in a wide variety of vehicles, including money market accounts. However neither an IRA nor a money market account are the most appropriate sources to use for routine bill paying. Unless you are 59 1/2, you shouldn't be using the IRA money at all, and even if you are, it would probably be best to have an ordinary checking account act as a transitional phase between a money market account and your bill payments.

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