What Is a Retirement Money Market Account?

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 (CDs), Treasury bills, and short-term commercial paper.

Although the account pays a relatively low rate of interest, the return is slightly higher than a savings account. It also 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.

Key Takeaways

  • Retirement money market accounts are money market accounts held in a retirement account such as a 401(k) or an individual retirement account, or IRA.
  • These accounts pay low interest, but provide liquidity and stability.
  • Retirement MMAs held in a bank are FDIC insured.
  • Retirees can use retirement MMAs to write checks and make withdrawals as needed.

How a Retirement Money Market Account Works

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 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.

On March 26, 2020, the Senate unanimously approved a $2 trillion coronavirus emergency stimulus package. It allows those affected by the coronavirus situation a hardship distribution to $100,000 without the 10% penalty those younger than 59½ normally owe. Account owners also have three years to pay the tax owed on withdrawals, instead of owing it in the current year. Or, they can repay the withdrawal to a 401(k) or IRA plan and avoid owing any tax—even if the amount exceeds the annual contribution limit for that type of account.

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 remains stable regardless of how the stock or bond markets perform.

As of the start of 2020, 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 returns, give the account holder the advantage of easier access to money should the saver 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.

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 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 the account holder’s balance effectively shrinks each year in terms of its purchasing power.

Penalty-free withdrawals generally are not allowed from retirement money market accounts until the holder reaches age 59½.

Special Considerations

Most people don't know how much money they'll need for their retirement. According to Bankrate, 45% of Americans who earn less than $30,000 aren't putting money away, while 21% of people across the country—regardless of income level—aren't saving for retirement at all. This puts them in a perilous position. Not saving means not being able to afford a certain lifestyle. And it also means you'll have to work longer, which may not be feasible.

Saving any money, no matter how small, makes a big difference, as long as you have the right strategy. The earlier you start, the better. If you're in your 30s or 40s, don't think it's too late. It's better to have something socked away than nothing at all. Consider putting money 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.

Short-term investments such as 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 low returns. But because they are easily liquidated, the account holder can rely on them for immediate needs, such as a car or a family emergency.

Investments that may be good for the medium term, anywhere between two to seven years, include stocks and bonds. By investing in 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 is not good. And when a big goal is approaching, such as college for children or your own retirement, also shelter some of this money in 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. You should also consider opening up 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, don't overlook it. It's a great way to earn pre-tax contributions, and your employer may match part or all of your savings—all of which are tax-free. Long-term investments give you more time to recover from market losses.