What Is an IRA Money Market Account?
An Individual Retirement Account is a tax-deferred account structure allowing investors to save assets designated as retirement income. The Internal Revenue Service regulates IRA accounts, allowing each IRA custodian to offer its own line of allowed investments. There are two types of money market accounts, both of which are allowed in IRAs, but both offered by two very different types of custodians.
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Bank Money Market
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A bank money market is similar to bank savings accounts. Consumers generally receive slightly higher interest rates compared to savings accounts because they are limited to six transactions per month. Bank money market accounts have adjustable interest rates contingent upon current fixed income markets. The bank money market account is regulated by the Federal Deposit Insurance Corporation. Holding such a money market in a bank IRA gives the IRA owner $250,000 in FDIC insurance on assets on top of the $250,000 in personal, non-qualified assets held at the bank.
Brokerage Money Market
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Brokerage firms offer money market accounts, often used as a holding or "sweep" account. Sweep accounts hold the money in a liquid, interest bearing account between brokerage transactions. For example, your stock trading IRA takes contributions in, holds them in a money market account within the IRA and then funds stock purchases by sweeping the money from the money market to clear the stock transaction. When securities are sold, the proceeds are swept back into the money market until the IRA owner either buys something else or takes a distribution. Brokerage IRA money markets are technically a low-risk mutual fund investing in short-term fixed income securities. While there is risk with any mutual fund and no guarantee, most money market mutual funds maintain a $1 per share or very close to it.
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Using IRA Money Market Accounts
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Either money market is generally considered for its liquidity. Even the bank money market with its limited monthly transactions allows IRA owners access to money in a financial emergency. Both are also used as holding accounts while an investor decided what to do, whether to move into securities, certificates of deposit or even transfer the IRA to a real estate IRA custodian.
Considerations
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A money market IRA is not generally thought of as a growth vehicle. IRA owners with many years of retirement savings ahead should look at higher yielding investment options with higher growth potential. Diversified investment portfolios help investors mitigate risk while taking strategic risks with limited percentages of IRA assets. The money market is one component of an overall IRA investment portfolio.
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