Many retirement investors are sitting on an underutilized asset, and may not even realize it. Across the country, there are billions of dollars in IRAs sitting in cash or cash equivalents like money market funds. According to ICI, IRAs hold approximately $17 trillion in assets, with around 38%—about $6.5 trillion—in mutual funds, but a notable portion of the rest is sitting in low-yield cash. This "sticky" cash issue isn't just a minor hiccup—it translates to hundreds of billions of dollars each year. While there are times when holding cash is the right call, often it’s simply a result of inaction, not intention.
Every dollar in your IRA has the potential to grow your future wealth. When cash sits idle for too long, you’re missing out on the opportunity to earn more, and that opportunity cost can add up. This situation can happen easily:
- You’ve rolled over a 401(k), and the funds haven’t been reallocated
- You’ve sold an investment in your SDIRA and haven’t yet reinvested
- You're between deals and waiting to research your next opportunity
These scenarios are common. But the key is turning unintentional cash holdings into strategic ones.
Cash Has a Purpose—When Used Intentionally
Having some liquidity in your retirement savings account is not always a bad thing. Sometimes, you need cash to meet plan expenses, such as paying taxes on a real estate holding or satisfying a required minimum distribution. Sometimes, maintaining a cash position on a portion of your account is a deliberate hedge in a volatile market. But letting cash languish in an IRA indefinitely may be like throwing money away.
Two important approaches come to mind, and they can be used in conjunction with each other.
Hold cash if necessary, but do it deliberately. It makes sense at times to have substantial cash in your SDIRA. You may, for example, be about to acquire a new investment in your account. Clearly, you need to have enough liquid assets to complete the transaction. However, all too often, individuals simply do not choose to invest their cash, which is still an investment decision.
Consider establishing a brokerage account. A brokerage account (sometimes called a brokerage window) allows you to put idle cash to work by investing in a wide variety of alternatives. Because these investments are typically publicly traded, they may be more liquid than other investments in your SDIRA portfolio. However, they may also offer a significantly greater upside than holding your assets in cash.
The goal isn’t to eliminate cash, but to make sure it’s held with a purpose. If you’re holding more cash than you need, or simply haven’t had time to explore other investment options, there are practical ways to take action.
Use a Brokerage Account to Stay Invested
SDIRA owners are familiar with alternative investments. Many of these options, such as small start-ups and most rental real estate purchases, are available only through private markets. Brokerage accounts, on the other hand, provide access to the more “traditional” investments that are available on public exchanges. Common investments include individual stocks and bonds, mutual funds, and exchange-traded funds (ETFs). Some brokerage account providers will also facilitate less common options, such as cryptocurrency purchases.
Brokerage accounts may offer a variety of share classes and may have different commission or payment structures; for example, some charge annual fees while others do not. However, regardless of the fee structure, a significant advantage of these accounts may be that you can invest your cash without tying it up unnecessarily. That is, you can gain access to a variety of investment options—with different risk and return characteristics—while still being able to liquidate them easily on a public exchange. Brokerage accounts can fill the gap between holding illiquid, hard-to-value private assets and holding cash.
How Does a Brokerage Account Work at STRATA?
Some SDIRA owners may already have a retail brokerage account with their financial professional or an electronic trading platform. However, a brokerage account within a self-directed IRA must be set up differently to satisfy compliance requirements. Specifically, it must be registered in the custodian's name and tax ID rather than in the investor's name and Social Security number. Brokerage firms may not permit this, so STRATA offers a simple solution through TradeStation®. Learn more about public equity trading and establish your brokerage account by following these simple instructions.
Does a Brokerage Account Make Sense for You?
Every investor has unique goals and circumstances, which is why consulting a qualified financial professional can be a valuable step. What matters most is making intentional, informed choices about how your IRA funds are put to work. A brokerage account can offer the flexibility to stay liquid while still seeking growth, helping you avoid the long-term impact of leaving cash idle.
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