A retirement money market account is a money market account that an individual holds within a retirement account such as an IRA. In a retirement money market account, deposits are placed in low-risk investments such as certificates of deposit, Treasury bills and short-term commercial paper. The account pays a relatively low rate of interest, slightly higher than a savings account, but provides liquidity and stability. For the account holder, it operates much like a checking or savings account and can provide peace of mind in volatile times. The downside is that the return on such an account tends to be very low compared to equity 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. For example, the account holder may not be able to withdraw money from the account without paying a penalty until he or she has 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 will remain stable regardless of what the stock or bond markets are doing. And unlike stocks and bonds, money market account balances held at a bank are FDIC insured up to $250,000 per depositor, per institution. As of 2018, retirement money market account returns were very low but still a few basis points ahead of a regular savings account and on par with a normal money market account. Regular savings accounts, with their lower return, do have the advantage of better access to money should the saver need it, though there may be limits on how many monthly transactions may be made. Similarly, 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. Retirement money market accounts limit penalty-free withdrawals until after age 59½.
A retirement money market account may also 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 may 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 that the account holder’s balance is effectively shrinking each year in terms of its purchasing power.