Roth IRA Vs. Money Market
Roth Individual Retirement Accounts are sums of money that enjoy preferential tax treatment from the Internal Revenue Service. People can invest Roth IRA money in almost any kind of investment vehicle. Some people invest Roth IRA money in bank issued money-market savings accounts, while others invest Roth IRA money in money market mutual funds.
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Time Frame
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Roth IRAs hold funds designated for retirement. The IRS does not permit investors to withdraw funds from Roth IRAs prior to age 59 1/2 unless they meet certain requirements that allow for withdrawals, such as higher education costs and first home purchases. People of all ages must wait five years after investing in a Roth IRA before beginning withdrawals. Unlike Traditional IRAs, Roth accounts do not have required minimum distributions at any age because funds were subject to income tax at inception.
Types of Money Markets
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Money market mutual funds are conservative funds that contain short-term investment instruments such as treasury bills and Certificates of Deposit. Fund shares are intended to remain at par with a share price equal to $1 at all times, although there are no principal guarantees.
Money market savings accounts were first created at the behest of Congress in 1982 to offer a bank product to rival money market mutual funds as safe haven short-term investments. Account holders can make up to six withdrawals from bank money market accounts per month.
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Function
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Bank money market accounts cater to people seeking to earn interest on funds that they do not want to tie up in CDs or other illiquid investments. Most banks require customers to maintain balances of $10,000 or more in money market accounts, but pay much higher rates of interest on balances above that amount than people earn on regular savings accounts.
Money market mutual funds are used by people who want to keep money in the stock market but are between investments. People can transfer money between different mutual funds held in the same fund family without charge.
Considerations
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The Federal Deposit Insurance Corporation insures consumers deposits up to $250,000 at every bank they have accounts at. People with large balances in money markets and other types of accounts can extend coverage by adding pay-on-death beneficiaries to their accounts, as each additional person receives $250,000 of FDIC protection.
The FDIC also provides separate coverage of $250,000 to protect retirement accounts held in bank products. The retirement coverage includes all types of IRAs, but does not include non-retirement accounts.
Misconceptions
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Many investors fear losing all of their money if their brokerage firm goes bankrupt. While money market mutual funds and other investments are not protected from losses due to the poor performance of underlying assets, many are protected from bankruptcy. Most brokerage houses enjoy $500,000 of protection from the Securities Investor Protection Corporation, which covers losses due to the custodial brokerage firm filing bankruptcy. This coverage protects Roth IRA money and non-retirement funds.
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