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Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 1:59 pm
by krylon80
Investopedia.com defines a "liquid" asset as:

"Cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value."

As an example, the site specifically mentions Money Market Funds as an example of a liquid asset:

"Money-market funds, a type of mutual fund that invests in low-risk low-yielding investments like municipal bonds (Similar to mutual funds, money market funds are also liquid investments.)"

Given that contributions to a Roth IRA can be withdrawn tax and penalty free at any time, I would consider contributions to a Roth IRA which are being held in a Money Market Fund as being a liquid asset.

However, I am being told by an investment professional that even though there are no restrictions on withdrawing Roth IRA contributions, and the funds are being held in a Money Market Fund, they are still not considered "liquid" because of the very fact that they are held in a Roth IRA account, which is classified as a retirement account.

So who's right? Should the funds be considered liquid or non-liquid?

Re: Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 2:05 pm
by KingRiggs
Many on this Forum consider them to be liquid and count Roth funds as part of their emergency fund...

The question of whether you SHOULD withdraw money from a Roth before 59 1/2 is another matter.

Re: Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 2:05 pm
by lakpr
I'd consider them as Non-Liquid, only because once I contribute money into these Roth accounts I don't ever want to withdraw from them until I reach the age 59.5. Yes I am aware that I can withdraw contributions any time without penalty, but that's also basically foregoing the Roth space of yester-years

Re: Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 2:59 pm
by ivk5
What purpose does this semantic exercise serve?

Serious question. If we know why you’re asking and what decision/action will be impacted by the answer, we can give a more appropriate answer.

Re: Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 3:06 pm
by bryanm
ivk5 wrote:
Fri Mar 15, 2019 2:59 pm
What purpose does this semantic exercise serve?

Serious question. If we know why you’re asking and what decision/action will be impacted by the answer, we can give a more appropriate answer.
This the heart of the question. For emergency fund purposes, it's probably liquid. For mortgage application purposes, it might not be. (Not because it's not liquid, but just because the lender may not consider it liquid.)

Re: Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 3:13 pm
by cherijoh
krylon80 wrote:
Fri Mar 15, 2019 1:59 pm
Investopedia.com defines a "liquid" asset as:

"Cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted into cash is similar to cash itself because the asset can be sold with little impact on its value."

As an example, the site specifically mentions Money Market Funds as an example of a liquid asset:

"Money-market funds, a type of mutual fund that invests in low-risk low-yielding investments like municipal bonds (Similar to mutual funds, money market funds are also liquid investments.)"

Given that contributions to a Roth IRA can be withdrawn tax and penalty free at any time, I would consider contributions to a Roth IRA which are being held in a Money Market Fund as being a liquid asset.

However, I am being told by an investment professional that even though there are no restrictions on withdrawing Roth IRA contributions, and the funds are being held in a Money Market Fund, they are still not considered "liquid" because of the very fact that they are held in a Roth IRA account, which is classified as a retirement account.

So who's right? Should the funds be considered liquid or non-liquid?
You are correct IMO. Your "investment professional" appears to be confusing asset type (cash equivalent, stock, bond) with account type (taxable, traditional retirement, Roth). This is IMO a beginner mistake, so I would run away from this guy or gal and wouldn't trust them with any of your money. It sounds like this person is sales person looking for a commission, which they likely wouldn't get for selling you a MM fund.

I wouldn't recommend using a Roth account as the lowest tier of an emergency fund. But if you are debating about beefing up an emergency fund or adding to your Roth account, investing in a MM inside your Roth could be a good temporary comprimise. You really want your Roth assest invested in funds that give you the highest "expected" returns which would be a stock fund not a cash equivalent like a MM fund.

Re: Roth IRA Money Market Funds-Liquid or Non-Liquid?

Posted: Fri Mar 15, 2019 3:13 pm
by abuss368
A money market fund is liquid but perhaps a little further down the branch from a savings account, money market, and so forth in a taxable account. I have seen money market accounts in a tax advantaged account (i.e. Roth, Traditional, Employer plan) as part of the overall asset allocation or simply a fund where all contributions and distributions flow through.