A liquid asset is cash or property that can be converted into cash relatively quickly and that is not affected by market prices or short-term market fluctuations. Bank accounts and money market mutual funds are common liquid assets. According to that definition, the classification of an IRA as a liquid asset depends on several factors. While it's possible that an IRA can be converted into cash quickly, potential retirement taxes and penalties, as well as the loss of future investment gains, make it less likely that you want to use your IRA to quickly access cash.
Generally speaking, only taxable investment accounts are considered truly liquid. This contrasts with tax-advantaged retirement accounts, which vary in liquidity but generally limit your ability to liquidate your assets. IRAs cannot be considered liquid if you haven't reached the required retirement age, since you'll still have to pay early retirement penalties from the IRS. However, you can request a withdrawal due to financial difficulties if your situation justifies the exemption from the 10% early withdrawal penalty.
Both businesses and consumers use liquid assets, cash or cash equivalents, and are considered the most basic type of asset available. Mutual funds pool money from different investors, and then the funds are invested in various portfolios, such as stocks and bonds. They are considered liquid, since an investor can sell their shares and receive cash income in a few days. In addition to bank accounts, IRA funds can be held in mutual stock funds, individual stocks and bonds, as well as in real estate or even gold coins.
IRA funds held in bank accounts or money market mutual funds are more likely to be considered liquid assets than funds held in investments that must be sold. Even if your traditional IRA is invested in liquid investments, taxes and retirement penalties generally disqualify a traditional IRA as a liquid asset. However, the ability to sell your gold necklace, car, or other fixed asset is often hampered because finding a buyer can be difficult. All withdrawals must be re-deposited in the same IRA or another IRA of the same type within 60 days.
For example, let's say that a company owns real estate and wants to liquidate it because it has to pay off a debt obligation within one month. A traditional IRA is usually funded by pre-tax contributions, which means you must pay taxes on any withdrawals you make from the account. This makes a Roth IRA more attractive to some savers, who fear needing the funds for an emergency. Investments in land and real estate are considered non-liquid assets because it can take months for a person or company to receive cash from the sale.
Because you can withdraw contributions without taxes or penalties, a Roth IRA can be considered a liquid asset, especially if you invest in a bank savings account or money market investment fund.