Can I Use My Money Market Account for a Roth IRA?
People who have existing money market mutual funds or money market savings accounts cannot begin using those accounts as Individual Retirement Accounts. Regular accounts are non-qualified, meaning that the Internal Revenue Service does not give them any special tax treatment. Roth IRAs are tax qualified and under IRS rules, investors cannot mix qualified and non-qualified funds in the same account.
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Types
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Money market savings accounts are standard products offered by financial institutions in the U.S. The accounts pay interest and deposited funds are protected by the Federal Deposit Insurance Corporation.
Money market mutual funds are very conservative investment vessels that are created with the intention of each share holding a par value equal to $1. The accounts are comprised of underlying assets including U.S. Treasury bills, commercial paper and negotiable certificates of deposit. Money market mutual funds are not protected by the FDIC.
Considerations
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People cannot add IRA funds to an existing non-qualified money market account or mutual fund, but they can open an identical account specifically under the Roth IRA tax umbrella. Investors can roll existing Roth IRA accounts or start entirely new Roth IRAs and use either type of money market to stow the funds. You can set up a brokerage Roth IRA investment holding account and purchase money market mutual fund shares for the account.
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Features
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Generally, people who are close to retirement transfer Roth IRA funds from aggressive mutual funds into more conservative instruments because they are more concerned with safeguarding principal than growing their investments. Both types of money markets cater to people who are chiefly concerned with principal protection. Additionally, people can make up to six withdrawals from bank money market savings accounts each month and can buy or sell money market mutual funds shares any day of the business week. Both account types offer liquidity, which often suits the needs of retirees.
Size
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As of 2010, the IRS allows people under the age of 50 with earned income to invest up to $5,000 per year into Roth IRA accounts. People over the age of 50 can invest up to $6,000 per year. The IRS allows single people with an Adjusted Gross Income below $105,000 and married people filing jointly with an AGI of less than $167,000 to make full contributions. Some people earning more can contribute a reduced amount but the majority are ineligible to contribute.
Warning
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People who start a new Roth IRA account in a bank money market savings cannot contribute more than $5,000 or $6,000 per year. Most banks assess a monthly service charge of between $10 and $15 on money market accounts for customers whose average daily balances fall below $10,000. Many mutual fund companies charge an annual custodian fee for money market mutual funds and some people end up paying a second custodian fee for the Roth IRA brokerage account that holds the IRA money market mutual fund.
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