Money market accounts are viewed by many as safe-haven investments where conservative investors can safely stow their savings. You can invest Individual Retirement Account (IRA) money or non-IRA money in one of these accounts. However, risk comes in many forms, and money markets expose you to certain dangers. Also, to complicate matters further, there are actually two different varieties of money markets.
Money Market Funds
Money market funds are simply mutual funds that contain low-risk investments such as treasury bills or short-term bonds. In theory, shares in a money market fund remain steady at a price of $1 per share. However, funds have been known to "break the buck" and fall below the dollar threshold during severe recessions. Neither regular money market funds nor funds holding IRA money are federally insured. However, your IRA funds are insured in the event that the brokerage firm holding your account goes bankrupt — but only if your broker belongs to the Securities Investor Protection Corporation (SIPC). The SIPC insures investment accounts up to $500,000 per account owner.
Money Market Accounts
Money market bank accounts are savings accounts that were originally conceived as a safe alternative to money market mutual funds. You can invest IRA money in a bank money market account, and you receive interest on your investment. In theory, your funds are safe since bank accounts aren't subject to principal fluctuation. However, you could lose some of your nest egg if your bank goes bankrupt. The Federal Deposit Insurance Corporation (FDIC) insures bank IRAs, but only up to $250,000 per account owner.
FIDC and SIPC insurance limits are applied on a per-institution basis. This means you can extend your coverage by splitting your investment between several banks or brokerage firms. On a non-retirement bank account you get an additional $250,000 of insurance coverage if you add a spouse or pay-on-death beneficiary to your account. Since IRAs are, by definition, individual accounts, you don't have the option of boosting your coverage by adding other people to your IRA money market.
Money market accounts and money market funds are often referred to as low-risk because these investments don't expose you to the same levels of danger as stocks or aggressive mutual funds. However, you're exposed to inflation risk when you put your cash in these types of conservative accounts. If inflation is growing at a faster rate than your investment, then life becomes more expensive, because you have to spend more to get less. You don't lose any actual cash, but you may have to curtail your spending.
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