Retirement Money Market Account: Overview, Benefits, and Examples

What Is a Retirement Money Market Account?

A retirement money market account is a money market account held within someone's larger retirement account, such as an individual retirement account (IRA) or 401(k). In a retirement money market account, deposits are placed in low-risk investments such as certificates of deposit (CDs), Treasury bills, and short-term commercial paper.

Key Takeaways

Retirement money market accounts are money market accounts held in a retirement account such as a 401(k) or an IRA.
These accounts pay lower interest rates but provide liquidity and stability.
Retirement money market accounts held in a bank are FDIC-insured.
If you're retired, you can use a retirement money market account to write checks and make withdrawals as needed.

How a Retirement Money Market Account Works

A retirement money market account is meant to be a temporary holding point for cash you move into the account before it's invested in securities with greater potential for returns. The deposits are invested in low-risk investments that may pay only slightly better than a savings account. But the benefit is that the funds are stable and liquid. The downside is that the return on such an account tends to be very low compared with equity investments or even less-liquid fixed-income investments.

A retirement money market account may be held within a Roth IRA, traditional IRA, rollover IRA, 401(k), or other retirement account. Unlike a regular money market account, a retirement money market account is governed by a retirement plan agreement. That means, for example, that you may not be able to withdraw money from the account without paying a penalty until you have reached a minimum age, such as 59½. As a benefit, however, the account balance may be allowed to grow tax-free.

A retirement money market account is a conservative investment that may be used as part of a diversification strategy within an overall retirement portfolio. Its value is expected to remain stable regardless of how the stock or bond markets perform.

Regular savings accounts, on the other hand, with often lower rates, give you the advantage of easier access to money should you need it, though there may be limits on how many monthly transactions may be made. Regular money market accounts may also have monthly transaction limits, but may offer the ability to use debit cards or checks to access the money. Some of the best money market accounts may pay higher interest rates than regular savings accounts. For example, in June 2023, the money market account interest rates ranged from 4.00% to over 5.00% APY.

Important

Money market funds are mutual funds that are offered by brokerages, investment companies, and financial services firms. They pool money from multiple investors and invest in high-quality, short-term securities. Their funds are easily accessible. While money market accounts sound similar (and people often confuse the two), they are actually closer to savings accounts. Money market accounts are on-demand, interest-bearing accounts that are held at a bank or credit union. Both types of accounts are recommended components of an overall retirement savings plan.

Advantages and Disadvantages of a Retirement Money Market Account

Unlike stocks and bonds, money market account balances held at a bank are FDIC-insured up to $250,000 per depositor, per institution.

In addition, a retirement money market account may be used to store the proceeds of stock and bond sales as the account holder gets older and seeks more-conservative holdings. In addition, money market accounts often have check-writing privileges, making it easy for retirees to withdraw retirement account funds as needed.

While these accounts sometimes pay a higher rate of interest than a generic savings account, a major drawback of retirement money market accounts is that they may not earn enough interest to outpace inflation, meaning your balance effectively shrinks each year in terms of its purchasing power. It's critical not to get complacent and leave cash in a retirement money market account for too long because the funds should be invested for optimum returns to boost your retirement savings.

Important

Penalty-free withdrawals generally aren't allowed from retirement money market accounts until you reach age 59½.

Part of a Retirement Savings Strategy

Most people don't know how much money they'll actually need for their retirement. Not saving enough means not being able to afford a certain lifestyle. And it also means you'll have to work longer, which may not be feasible.

Short-term investments such as high-yield savings accounts, regular money market accounts, and certain CDs are great places to store your cash. As noted above, these investment vehicles are insured and provide lower returns. But because they are easily liquidated, you can rely on them for immediate needs, such as a car or a family emergency.

Tip

Consider putting your money saved into different buckets—one for the short term, one for the medium term, and one for the long term—all of which can serve a different purpose.

Investments that may be good for the medium term, anywhere from two to seven years, include stocks and bonds. By investing via a brokerage account, for example, you can get exposure to the market, giving you enough time to generate significant returns when the market is good. Diversifying these investments helps protect you when the market isn't good. And when a big goal is approaching, such as college for your children or your own retirement, you can shelter some of this money in regular money market accounts and similar safer harbors.

Your long-term investment bucket—for a horizon of more than seven years—should also include stocks, bonds, and other securities like mutual funds. In addition, you should consider opening an IRA, a 401(k), or a Roth IRA, in which you can hold a retirement money market account. If you have an employer-sponsored plan, it's a great way to invest pretax money, and your employer may match part or all of your savings. Long-term investments give you more time to recover from market losses.

What Is Unique About a Retirement Money Market Account?

Money in a retirement money market account is governed by a retirement plan. This can place some limits on what you can do with the money in this type of money market account. For example, it means you can’t withdraw money from your retirement money market account until you have reached a certain age. On the flip side, the money in the account can grow tax-free or tax-deferred, although it shouldn't be left in a money market account for long. You may be able to maximize returns by taking the money and investing it in securities like stocks.

How Do a Regular Money Market Account and a Retirement Money Market Account Differ?

The main difference between a retirement money market account and a traditional money market account is where the money and account are held. A retirement money market account is part of a broader retirement account, such as a 401(k) or an IRA. A traditional money market account is usually held at a bank or credit union and operates much like a savings account but with check-writing privileges.

How Is a Regular Money Market Account Different from a 401(k)?

A regular money market account is similar to a savings account in that the money is liquid and offers a specific rate of interest. A 401(k) is a tax-deferred account that acts as a vehicle for a wide range of investments to save for retirement. Contributions to a 401(k) are made with pre-tax money and you must pay taxes on your withdrawals. A regular money market account is funded with after-tax dollars, and there are no tax benefits associated with these accounts. Money market accounts come with an interest rate that guarantees returns, but it can change over time. A 401(k) account invests money in funds, stocks, and bonds, and returns are not guaranteed.

The Bottom Line

A retirement money market account is a money market account that's part of a retirement account, like an IRA or 401(k). In a retirement money market account, your money is placed in lower-risk, fairly liquid accounts and investments like CDs, Treasury bills, and short-term commercial paper.

This type of money market account is meant to be a temporary place for your cash before you move it into the account before it's invested in securities with greater potential for returns. Money market deposits are invested in low-risk options that may pay only slightly better than a savings account. But the benefit is that the funds are stable and liquid. However, the return on such an account tends to be lower than equity investments or fixed income investments, so it's important to not wait—move your money into investments where you can potentially earn better returns to maximize your retirement savings.