A retirement money market account is a money market account that you hold in a tax-advantaged retirement account, like a 401(k) or an IRA. You use it as an interest-bearing account to hold cash in your retirement portfolio. These are depository accounts which means that, like all banking products, they offer a basic upside/downside profile compared with financial securities. The advantage of this account is that it is more secure and liquid than an investment. The disadvantage to this account is its low rate of return compared with most investments. Talk to a financial advisor to decide if a money market account is right for you.
What Is a Money Market Account?
A money market account is a form of depository bank account, like a checking or savings account. This means that the account holds cash, not investment assets that you would later sell for cash. The main advantage of a money market account compared with other depository accounts is that it tends to pay a higher rate of return. For example, at the time of writing money market accounts paid an average 0.62% interest rate nationwide compared with 0.07% average checking rates and 0.43% savings. However, some banks can go up to 1.5% or even 2.0% depending on the nature of the account.
Like most depository accounts, these rates are variable and subject to change based on the market. This comes with the standard protections of any depository account. This means that your money is backed by the credit of the bank, by the Federal Reserve’s commitment to banking stability and by the FDIC as a last resort.
The main disadvantage to a money market account compared with other depository accounts is liquidity. A standard money market account limits certain types of transactions that you can make per month. Typically, you can withdraw an unlimited amount of cash from ATMs, but you have a limited number of transactions that you can make via check, debit card and electronic transfer.
Note that a money market account is different from the similarly named money market fund. A money market account is an FDIC-insured banking product in which you keep cash. The latter is an uninsured investment product structured as a mutual fund that invests in short-term maturity-based assets.
What Is a Retirement Money Market Account?
It is not uncommon for individuals to hold some cash in their retirement accounts at any given time. Sometimes this is because they want the security of a banking product and are willing to accept low rates of return in exchange. Most of the time, though, this is for moving money around as the individual buys and sells assets.
For example, say that you sell a group of stocks in your 401(k). Then, three months later, you use that cash to buy stock in another company. That money has to sit somewhere in the meantime. There are many options for this and virtually all brokers offer an account for holding cash. However, some investors want a better interest rate than their broker may offer. That’s where a money market retirement account can come in.
A retirement money market account is a depository account that you hold in a tax-advantaged retirement portfolio like a 401(k) or an IRA. It holds cash on either a short- or long-term basis, in the same way that a brokerage account and a savings account may do so. The main advantage is that a money market account will typically offer a better interest rate than a savings account and may offer better rates than a brokerage account.
A retirement money market account receives the same tax benefits and restrictions as the rest of the account. In a pre-tax account, such as a 401(k), this means that you can fully deduct all of the cash you put into this account. In a post-tax account, such as a Roth IRA, this means that you pay no taxes on the account’s gains.
In all cases, once you have put this money in a retirement money market account, the IRS significantly restricts your ability to withdraw the money before retirement. However, you can freely move this money into your retirement account. For example, say that you have a money market account in your 401(k) plan. You can use this cash to buy other assets and make investments and you can move this cash to other accounts, so long as those accounts and assets are all held within your 401(k).
For most investors, the best use of a retirement money market account is as a high-interest wallet. The returns on this product are better than you will likely get on any other cash account, so it will be useful for holding cash in between investments. However, the returns are still quite low relative to the market and even inflation, making this a poor vehicle for building long-term wealth. Generally speaking, this is a good place to put your money in between investments, but not a good investment in its own rights.
Bottom Line
A retirement money market account is a depository banking product that you hold in a retirement account like a 401(k) or an IRA. You can use it to hold cash in your retirement account at a higher interest rate than many comparable products.
Retirement Security Tips
- A retirement money market account can be a good idea, but you should make sure to get the right interest rate first.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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