What Is A Retirement Money Market Account?

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As a nationally recognized personal finance writer for the past decade, Jacob Wade has written professionally about banking and other consumer topics for Investopedia, Money.com, The Balance, LendingTree, Britannica Money, Time Stamped, GoBankingRates, and other widely followed sites. He has also been a featured expert on CBS News, MSN Money, Forbes, Nasdaq, Yahoo Finance, GoBankingRates and AOL Finance. He is the owner of RoadmapMoney.com and a personal finance coach in his spare time.

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Michael AdamsLead Editor, Investing

Michael Adams is lead editor, investing at Forbes Advisor. He's researched, written about and practiced investing for nearly two decades. As a writer, Michael has covered everything from stocks to cryptocurrency and ETFs for many of the world's major financial publications, including Kiplinger, U.S. News and World Report, The Motley Fool and more. Michael holds a master’s degree in philosophy from The New School for Social Research and an additional master's degree in Asian classics from St. John’s College.

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Michael Adams

Michael AdamsLead Editor, Investing

Lead Editor, Investing

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What Is A Retirement Money Market Account?

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Did you know you can put your retirement funds in an interest-bearing money market account rather than investing in the risky stock market?

While most retirement accounts focus on index funds, stocks, bonds and other assets, you can actually park your retirement money in an FDIC-insured money market account as well. This offers you the liquidity of a savings account while earning a higher yield on your money.

But retirement money market accounts aren’t the same as regular savings accounts. They’re governed by different rules, and they usually exist inside a traditional IRA, Roth IRA or 401(k).

What Is an IRA Money Market Account?

An IRA money market account is a type of money market account held inside an individual retirement account (IRA). While similar to a savings account, IRA money market accounts pay a slightly higher yield on deposits and may have a higher minimum deposit.

You can typically choose to deposit funds into your retirement money market account through a traditional or a Roth IRA, which have different tax implications.

But there’s a key difference between a traditional IRA and a Roth IRA: A traditional IRA gives you a tax deduction for funds deposited up to the annual contribution limits. You’ll pay income taxes when withdrawing funds from a traditional IRA. A Roth IRA, on the other hand, doesn’t offer any tax breaks up front, but it does offer tax-free withdrawals in retirement.

In addition, interest earned within a traditional IRA money market account grows tax-free. You’ll only owe income tax when you withdraw money. However, you could also owe a 10% early withdrawal penalty on any money you pull out before age 59 ½, which is at or near retirement age for many people.

If it’s a Roth IRA, you can withdraw contributions at any time, free of both income tax and penalty. To avoid the 10% early withdrawal penalty on earnings, however, withdrawals of earnings must be after you reach age 59 ½ and after you’ve had the account for at least five years, unless you qualify for certain exemptions.

Some 401(k) plans also provide the opportunity to deposit funds in a money market account. However, just like with an IRA money market account, the funds deposited in a 401(k) money market account are beholden to the same withdrawal requirements as any other funds held in the 401(k).

How Does an IRA Money Market Account Work?

A retirement money market account differs from a traditional money market account in that it is a money market account held in either an IRA, 401(k) or other retirement account. In some cases—such as a traditional IRA or 401(k)—this means the retirement money market account can offer tax advantages that regular money market accounts can’t.

For example, an IRA money market account is held within your IRA and acts as a safe place to hold funds that are not invested elsewhere in the market. Many brokers automatically open a money market account for you when you open your IRA, and every time you deposit funds, they are held in the money market account until you choose your investments.

Some investors use their IRA money market account as an investment strategy, holding a percentage of their funds in the account for stability. More conservative investors may put more money into the account to earn a predictable yield without the risks of investing in the stock or bond markets.

There are a number of other advantages that come with a retirement money market account:

Check-writing privileges. You may have access to check-writing privileges inside your retirement money market account. But make sure you are over the stated retirement age before writing checks from the account, or you might be hit with a penalty.
FDIC insured. Your money market deposits are usually insured by the FDIC (or NCUA, if held at a credit union) for up to $250,000 per depositor, giving you the same protection you’d have in a regular bank or credit union money market account. Stocks and bonds are not insured by the FDIC and NCUA.
Liquidity. The funds in a retirement money market account are also liquid. You can choose to buy stocks, bonds, ETFs or other securities within your retirement account with the money market funds. And when you sell securities, typically, the funds settle into your money market account until you choose to make another purchase or withdraw from the account.

Keep in mind, however, that money market accounts usually limit the number of transactions per month. It’s important to note these limitations before depositing funds into any money market account. Too many monthly withdrawals or transactions can trigger an excess transaction fee in your account.

Pros and Cons of IRA Money Market Accounts

Pros

Low-risk investment account
FDIC or NCUA insurance
More liquid than investing in the market

Cons

Low returns compared to the stock market
Cannot access funds before certain time limits
May not outpace inflation

How To Find the Best IRA Money Market Rates

IRA money market accounts are available through most major brokers and banks that offer retirement accounts. You can compare money market rates from each institution to find which ones pay the highest interest rates.

However, it’s important that you don’t open an IRA account solely to invest in a money market account. While some brokers or banks offer better rates than others, you’ll want to work with a company that also gives you access to the other types of investments you plan on holding in your IRA. This will give you more flexibility in your investment strategy and allow you to diversify your investments without opening multiple accounts.

Money Market IRA vs. Traditional IRA

While the term “money market IRA” may suggest that it’s a different type of retirement account, money market accounts are actually held within a regular IRA account. In this way, you can think of a money market account as another type of investment you can choose within your traditional IRA, Roth IRA or 401(k).

In addition, traditional IRAs and 401(k)s are pre-tax retirement accounts that allow you to invest up to a maximum annual contribution and deduct contributions from your taxable income. Within these traditional accounts, you can choose to hold your funds inside a money market account. This is how to invest in a “money market IRA.”

A better term for “money market IRA” would be a “money market account within your traditional IRA.”