IRA Money Market Accounts for Retirement Savings

See when a money market account is a good fit for an IRA, and how to find the best money market rates for your money market IRA.
By Richard Barrington

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An Individual Retirement Arrangement, or IRA, is intended for long-term retirement savings.Money market accountsare largely designed for short-term liquidity. So how do the two go together?

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.

What is a Money Market Account?

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 they can offer a slightly higher interest rate on a money market account than on an ordinary savings account.

Both savings accounts and money market accounts may limit the number of transfers such as payments you can make out of the account each month.

Often, money market accounts have more of this kind of restriction than savings accounts. This is so flows in and out of these accounts don't become too disruptive to the investments the bank makes.

A bank might also require a higher minimum deposit for a money market account than for an ordinary savings account.

The payoff for these additional restrictions on money market accounts is that they often offer a higher interest rate than savings accounts.

However, the difference in interest rates is slight, and rates and other terms vary a lot from bank to bank. So, often there's little practical difference between savings and money market accounts.

This means that savings and money market accounts should be considered side-by-side when you're looking for the best rate on a safe and liquid type of account.

Safety of Money Market Accounts

A key feature of a money market account offered by a bank is that it's covered by FDIC insurance up to the limit of $250,000 per depositor at each institution.

Money market accounts offered by credit unions are covered by NCUA insurance, another form of federally-backed deposit insurance.

Money market accounts shouldn't be confused with money market funds. Though the names are similar, there are important differences.

Amoney market fundis a form of mutual fund. That means your money is mixed in with that of other investors.

While money market funds are like money market accounts in that they are accessible at any time and offer a modest interest rate, one key difference is that money market funds are not protected by federal deposit insurance.

Also, because they pool the investments of many different depositors, flows in and out of a money market fund can affect the performance of that fund.

Overall then, money market accounts are a little safer than money market funds. In a nutshell, a money market account offers stability and near-term liquidity while paying a modest interest rate.

Understanding IRA Rules

An IRA isn't a type of investment. Instead, it is a tax-advantaged retirement savings account that you can be invested in a variety of ways. Think of the IRA as a wrapper that you can put around a variety of different investments.

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. Both allow for investments to grow within the IRA without being taxed. With a traditional IRA you get a tax deduction on money going into the account, but pay taxes on money coming out. With a Roth IRA you don't get a deduction on money going in, but you don't pay taxes on money coming out in retirement.
  2. IRAs are designed for retirement saving, so there is generally a penalty if you take money out before you reach age 59 ½. This penalty is 10 percent of the early withdrawal, plus any ordinary income tax due on the money. Under certain circumstances you can take the amounts you contributed out of a Roth IRA before age 59 ½ without paying a penalty, but not the investment earnings on those amounts.
  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 account can be a good fit for an 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 risk 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, assuming that all are held at an FDIC-member bank.

IRA Money Market Account Feature Comparison

Regular savings

Money market

IRA money market

Tax advantage

None

None

Taxes may be deferred and/or reduced

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 restrictions based on age for withdrawals

Why it Pays to Look for the Best IRA Money Market Rates

In return for their safety and liquidity, money market accounts usually pay fairly low interest rates. These are typically comparable to savings account rates, and lower than long-term CD rates.

Even though money market rates are relatively low, there are often big differences between the best money market rates and the lowest ones. Choosing the right account can mean earning several times more interest.

Also, even though money market rates are subject to change at any time, the same banks are typically among the leaders in offering the best money market rate. So, even as rates go up and down, comparing rates when you open your IRA money market account can continue to pay off.

Tips for Finding the Best IRA Money Market Rates

Here are some tips that can help you identify one of the best IRA money market accounts:

  1. Find out if the bank offers IRA accounts.

    Not all banks that offer money market accounts also offer IRAs.

  2. Check for federal deposit insurance.

    If you want the full safety of a money market account, make sure you get an insured account with an FDIC-member bank or an NCUA-member credit union. Also, since retirement savings can grow to large amounts over time, make sure you keep the amount of money at any one institution within the $250,000 insurance limit.

  3. Make sure the terms on IRA money markets are the same as for other money market accounts.

    Banks may have different rates or extra fees for IRA accounts.

  4. Look for one of the highest interest rates.

    This can make a big difference. The MoneyRates.commoney market account pagecan help you find which banks currently have the best rates. Again though, check with each bank to find out what rate applies to IRA money market accounts.

  5. See how rate tiers would affect your account.

    Some banks apply different rates at different balance amounts. When comparing rates, be sure to compare the rate that would apply to the size of your account.

See the MoneyRates.commoney market account pagefor more details, or start by reviewing the selection of accounts displayed below.

Under the right circumstances, a money market account can be a good fit for an IRA. You can make that fit even better by finding one of the best money market rates.

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