Recently, my dad and I were chatting about finance, and we started talking about how he currently has invested the cash portion of his IRA (Individual Retirement Account) in a money market mutual fund. He then proceeded to tell me that the current yield he is earning on this cash is 0.01%.
In all seriousness, I was shocked when I found out that this interest rate was so low, considering that the current interest rate on my high yield savings account (taxable account) with Dollarsavingsdirect.com is 1.30%. In doing a quick search, I confirmed that not only was the rate indeed this low at the brokerage he uses, but that the money market mutual fund offered by Vanguard.com (Vanguard.com Money Market Mutual Fund Page) was very low as well (0.01%).
So, this begs the question, just what should an investor do with the cash portion of his/her retirement account?
In a previous post, I detailed an investigation in to the different taxable cash savings account options (see post My Money Blog – Savings Account Options).
However, it is clear that the landscape changes significantly when your options are limited to the selections inside your IRA or 401k. And, since the My Money Blog asset allocation rules (can be seen at the following link – My Money Blog – Asset Allocation Targets) dictate that I need to keep 5% of my retirement holdings in liquid cash assets, this is one detail that simply cannot be overlooked.
So, let’s take a look at the choices by looking at each of my two account types:
401k Cash Savings Options
- My 401k is administered via my employer through Fidelity.
- There is only one option for cash savings within this account. It is an institutional Fidelity money market mutual fund with the following attributes:
- 7 day yield of 0.21%
- 1 year return of 0.53%
- YTD return of 0.05%
Roth IRA Cash Savings Options
- As I have mentioned previously, my Roth IRA is managed through Vanguard.com.
- There are several money market options here, but the only one that I am really interested in / that applies to my circumstances is the Vanguard Prime Money Market Mutual Fund (Ticker Symbol VMMXX). It has the following attributes:
- 7 day yield of 0.01%
- 1 year return of 0.28%
As you can clearly see, the returns available at this low interest rate period in the US will not even be able to keep pace with inflation, which averages around 3.2% per year.
Surely, there have to be better options available! I mean, come on capitalism! Right? 🙂
A quick search on Google.com of investment options for cash in retirement accounts does not reveal any substantial information.
Next, I then thought back on the 1st IRA I ever opened up. It was a fixed interest rate CD with Bank of America. I really opened it on accident with only several hundred Dollars, and closed it a few months later (yes, I incurred the taxes and withdraw penalty of 10% – it was a mistake!).
1) IRA CD
A quick search at Bank of America’s website revealed the following 30 month term CD for IRA accounts. Bank of America – 30 Month Term CD for IRA Accounts, with the following attributes:
- 2.10% annual yield
- $2000 minimum balance to open
- 30 month fixed term (penalty incurred if taken out of CD before 30 months is up)
- FDIC insured
2) IRA Money Market Savings Account
I also found that Bank of America offers a money market savings account designed to fit in IRAs that can be found at the following link Bank of America – Money Market Savings Account for IRA and has the attributes below:
- 0.60% APY, with a variable rate (meaning that rate will increase or decrease as the prime rate changes)
- $100 minimum balance to open account
- FDIC insured
- No fixed term. Money can be moved in and out of money market account as desired (as long as stays in IRA).
Note: In my research, I found that the banks that offer high yield savings accounts, such as the one from Dollarsavingsdirect.com, do not offer their savings account to be housed in IRA account.
So, knowing this information, what does it mean for me?
Well, in my particular case, the 30 month fixed term CD IRA does not suit me because I don’t want to have that much money tied up for the fixed term, even though it does have a higher yield. Furthermore, since the yield on the money market IRA account with Bank of America more or less matches the interest on the money market mutual fund in my 401k, I would proceed to invest my cash in the money market mutual fund in my 401k account with Fidelity. You can compare CD rates online to find the best option for your financial situation.
It is not the best return, but it also saves the hassle of having to open up yet another IRA account and keep track of it. Next, it would just be a game of hoping that the interest rates in the US increase at some point, and take this interest rate to higher levels!
Additionally, and maybe even more important, is the key takeaway that there are other investment options in IRA accounts that could yield higher returns for cash reserves than merely what is available in your pre-existing IRA or 401k account.
Please let me know if you have any questions.
Keep on learning!
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