How Safe Are Money Market IRA Accounts?
If you have been reviewing investment products and looking for some place secure to stash your retirement savings, you may have stumbled across a product called a money market IRA. This is one of the safest places to store your savings--with a few caveats. There are some risks, including inflation and principal loss, among others.
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Definition
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A money market IRA account typically refers to a Roth or traditional IRA whose funds are invested in a money market account--a high-yield savings account. Money market accounts are FDIC-insured against loss, meaning that the federal government guarantees the funds in these accounts in case the issuing bank defaults.
Money market IRAs can also refer to IRAs primarily invested in money market mutual funds, though this is less common. Money market funds are mutual funds whose assets are invested in Treasury securities, short-term debt obligations (bonds having maturities less than 13 months) and repurchase agreements. These brokerage products are not FDIC-insured and are subject to market risk. They often yield higher return than money market accounts, but there is a risk of principal loss.
Risks
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If your money is in a money market account, there is no risk of loss of principal. This kind of money market IRA is about as safe as your retirement funds can be. If your funds are in a money market fund however, they are only relatively safe. There is a small risk of principal loss, even though money market funds are one of the least risky investments around.
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Fees
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Money market account terms usually require you to maintain a certain minimum monthly balance, which can be as low as $1,000 and as high as $10,000. If this balance is not maintained the issuing bank may assess monthly fees, which could erode both your interest and principal.
Money market funds may charge annual fees as a percentage of your assets that can also seriously erode your returns. Carefully review the prospectus of any mutual fund you wish to buy to assess fees, risk and other relevant factors.
Returns
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Money market accounts and funds are conservative investments. With a large retirement savings target and a large investing time horizon, you are likely better off to hold at least a portion of your IRA assets in more aggressive investments, such as stocks and bonds, which have historically out-performed money market accounts over 10-, 20- and 30-year periods. However, if you are close to retirement age and have amassed a sizable amount of savings, you are likely better off with most of your assets in conservative investments like money market accounts and funds.
Inflation
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Inflation--gradual increases in the prices of goods and services--can reduce the purchasing power of your savings. Returns on money market accounts and funds may match or exceed the annual inflation rate, but there is no guarantee that they will. If you believe the country is headed for a period of excessive inflation during your retirement years, consider inflation-linked securities, such as Treasury Inflation-Protected Securities (TIPS) instead.
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