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IRA Money Market Accounts to Save for Retirement

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White-couple-discussing-financesAn Individual Retirement Agreement, or IRA, is a long-term-retirement-savings vehicle that is typically left untouched for many years. However, there are times when market volatility or the need for some measure of liquidity may have you looking for a way to stabilize your investment position without disrupting it.

While IRAs are intended for long-term retirement savings and money market accounts are largely designed for short-term liquidity, there are situations where they're a perfect fit for one another. Recognizing the appropriate role for IRA money market accounts starts with understanding the basics of money market accounts and IRAs.

Understanding money market accounts

A money market account is a form of savings account, though it may have more restrictions. Banks take the deposits in their money market accounts and invest them in a variety of very short-term, interest-bearing securities. They do this in many cases so that they can offer a higher interest rate on a money market account than on an ordinary savings account.

Savings accounts are limited to six withdrawals per month, but money market accounts might have even more limitations. This is so that flows in and out of these accounts don't become too disruptive to the investments the bank makes to earn interest for them. The bank might also require a higher minimum deposit for a money market account than for an ordinary savings account.

A key feature of a money market account offered by a bank is that it is covered by FDIC insurance up to the limit of $250,000 per depositor at each institution. This makes it distinct from a money market fund, which is a form of mutual fund that is not covered by FDIC insurance.

In a nutshell, a money market account offers stability and a reasonable level of near-term liquidity while paying a modest interest rate.

Understanding IRA rules

IRAs have several specific rules that you should get to know before starting one, but here are some highlights:

  1. There are two types of IRAs -- Roth and traditional. Each offers tax advantages, though in differing ways.
  2. IRAs are designed for retirement saving, so there is generally a penalty if you take money out before you reach age 59 1/2. This penalty is 10 percent of the early withdrawal, plus any ordinary income tax due on the money.
  3. You can use a wide variety of investments within an IRA, though your choice will depend on the offerings of the IRA custodian (i.e., the bank or brokerage firm housing the IRA) you choose.

Because IRAs are designed for long-term retirement saving, people often fund them with growth-oriented investments. However, there are cases where a money market can add valuable stability to your IRA.

What IRA money market accounts do

Here are some examples of situations where a money market account is a good fit for an IRA:

1. Balance out more volatile investments

Suppose you have a substantial portion of your IRA invested in growth-oriented investments like stocks. The ups and downs of those investments can wreak havoc on retirement planning. You might want to add a little more predictability by putting a portion of your IRA in a more stable vehicle like a money market account.

2. Reduce volatility as you approach retirement

Changes in the value of your retirement savings can be especially disruptive when you are close to retirement. For this reason, retirement savers often downshift to a more conservative asset allocation as they near retirement, and a money market IRA can be a part of this shift.

3. Provide liquidity for retirement withdrawals

Once you reach retirement age and are taking regular withdrawals from your IRA, it helps to have money ready for those withdrawals in a stable vehicle like a money market as opposed to a variable investment whose value might be down just when you need to access the money.

Comparing IRA money market account features

While a savings or money market account outside of an IRA can also provide stability and liquidity, an IRA money market does so while allowing you to retain the tax advantages of an IRA until you actually withdraw the money. The table below shows how those three alternatives stack up against one another.

IRA Money Market Account Feature Comparison

Regular savings

Money market

IRA money market

Tax advantage

None

None

Taxes may be deferred and/or reduced

National interest rate

0.10%

0.19%

0.19%

Requires minimum deposit

Maybe

Depending on institution

Maybe

Depending on institution, and may require a higher deposit than a regular savings account

Maybe

Depending on institution, and may require a higher deposit than a regular savings account

FDIC insurance

Up to $250,000

(Per depositor, per institution)

Up to $250,000

(Per depositor, per institution)

Up to $250,000

(Per depositor, per institution)

Penalty for early withdrawal

None

None

Penalty typically applies if withdrawing before age of 59 1/2

Access to money

Immediate

Some limits may apply to the number of monthly transactions

Immediate

The number of monthly transactions may be more limited than for a savings account

Subject to tax restriction

Based on age for withdrawals

Finding the best IRA money market rates

The average interest rate for money market accounts as of this writing is 0.19 percent. That's not very exciting, but it is important to note that you can earn significantly more interest if you look for the best IRA money market rates.

For example, the MoneyRates.com America's Best Rates survey found several money market rates offering in excess of 1.50 percent, so you can earn more than eight times the average amount of interest if you take the time to shop. Just be sure to do that shopping before you choose an IRA custodian because, once you do, you'll be limited to the products offered by that custodian.

Earning higher interest with all the advantages of an IRA money market account can be a sound retirement-saving move, and one that offers liquidity and stability at the same time.

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