When saving for retirement in an individual retirement account, or IRA, you have a lot of options. But have you considered an IRA money market account, or IRA MMA?
As you get closer to retirement, an IRA MMA is one way to diversify your overall retirement portfolio, offering a low-risk element to add to your overall mix of investments. It can also be a smart place to keep the retirement savings that you may need to spend soon.
An IRA MMA, which is a deposit account, offers competitive interest rates, FDIC protection and the tax advantages of an IRA, as well as the ability to occasionally make withdrawals directly from the account. (A similar type of account, called a money market fund, or MMF, is not FDIC-insured and allows you to invest in mutual funds. For more details, read this article.)
Are You Missing Out on an IRA MMA?
As you near retirement, you will likely want ready access to at least some portion of your funds. At the same time, though, you may want to keep that money working for you by earning interest. One advantage of an IRA MMA versus an IRA certificate of deposit, or CD, is that you can make withdrawals whenever you want. In the past, these withdrawals were limited to six per month, but that is no longer required so many institutions no longer apply it. Most IRA MMAs also allow you to write checks and make ATM cash withdrawals from the account.
You can also make contributions whenever you want, within the IRS contribution limits that apply to you. If you are earning money in retirement, contributions to a traditional IRA are tax-deductible and can reduce your income tax burden.
While the interest rate in an IRA MMA may not be as high as an IRA CD, that flexibility to deposit money may be important to you. And interest earned on an IRA MMA, along with the tax benefits, may make it worth investigating. That’s because the interest your money earns in the IRA MMA is tax-free in a traditional IRA, until you cash out. And it’s tax-free in a Roth IRA forever. (To find out more about how IRAs work, check out this article.)
How Does an MMA Work?
When you open an IRA MMA, you can deposit money directly into the account. IRA MMAs offer slightly higher interest rates, on average, than savings accounts.
Like savings accounts, you can usually access your funds in an IRA MMA via check or even ATM. But if you do so before the age of 59½, you will have to pay penalties on your withdrawals.
In retirement, an IRA MMA offers the convenience of easy withdrawals, but beware that they are not necessarily for everyday purchases. Unlike checking accounts, most IRA MMAs come with limits on the number of transactions you can make per month or per quarter.
Most IRA MMAs also make depositing money easy as well, allowing you to take deductions on any income you earn in retirement with ongoing IRA contributions.
It’s also important to note that the money you keep in an IRA MMA is FDIC-insured up to the maximum of $250,000.
IRA MMAs: Traditional vs. Roth
Choosing a traditional IRA or a Roth IRA, comes down to when you want to reduce the income taxes you pay.
To pay less taxes this year, a traditional IRA is likely the way to go, as contributions to a traditional IRA allow you to take a deduction on your current income taxes. But you’ll have to pay income taxes on the withdrawals, including interest, after you retire.
You may, however, be concerned about the income taxes that you’ll have to pay after you retire. In that case, a Roth IRA may be a better choice, as Roth contributions come entirely from your post-tax income. The advantage is that withdrawals from a Roth, along with interest in the account, is available to you income tax-free in retirement.
Required minimum distributions, or RMDs, are also a factor to consider. In a traditional IRA, you must withdraw a certain amount of money and pay taxes on it, after you reach a certain age. But Roth IRAs have no such requirements.
Liquidity When You Need It
The advantages of IRA MMAs are higher interest rates than most savings accounts and the tax advantages of an IRA, along with the flexibility to make numerous transactions. That liquidity can be essential when you have other funds that are less liquid, such as money invested in your 401(k) or a traditional IRA.
An IRA MMA is a conservative way to earn interest on your money while maintaining the ability to withdraw whenever you need to. And if you’re about to enter retirement, it may be a smart tool for your savings and cash management strategy.
Colin Dodds has written for preeminent media, technology and financial companies. He is the author of several acclaimed books, including Pharoni and Ms. Never. He lives in New York City with his wife and children.
LEARN MORE: Synchrony's savings products
Need to make a payment?
Use the Log In button to find your account login
portal.