Guide to a Money Market Account Held Within a Retirement Account

When you open an individual retirement account (IRA) or 401(k), you can generally choose from a variety of investments, such as stocks, bonds, options, real estate, and more. You may also be able to put some of the money in a money market account (MMA), which typically earns a higher annual percentage yield (APY) than a traditional savings account but remains liquid.

While you might choose to keep most of your retirement savings in potentially higher-return investments, it may make sense to have some of your retirement funds in an MMA, since it’s a relatively low-risk place to store cash. Even if the return may be lower than other investments, it’s predictable.

Another reason to have some of your retirement savings in an MMA is to serve as a holding place as you sell investments or transfer money between them.

Unlike a regular MMA, one that is offered as a component of a retirement account is subject to the benefits and restrictions of the retirement account. Here’s what else you need to know about retirement accounts that offer a money market component.

What Is a Money Market Account That Can Be Used for Retirement?

While there’s no such thing as a “retirement money market account,” some custodians allow you to keep part of your money in a money market within your retirement account. The money market account (MMA) can be within a traditional, rollover, or Roth IRA, a 401(k), or another retirement account, which means those funds are governed by the rules of that account.

If the MMA is a component of a traditional IRA, that means you can contribute pretax dollars (up to certain limits), your money can grow tax deferred, and you won’t be able to withdraw funds before age 59½ without paying taxes and penalties.

Money held in the money market component is liquid. For some investment accounts, an MMA is used as the default position for contributions. In this case, money you transfer into the account and investments you sell will go into the money market component. You can use the funds in the money market to purchase investments within the retirement account.

Recommended: The Difference Between an Investment Portfolio and a Savings Account

What Is a Money Market Fund?

Bear in mind an important distinction: A money market fund, which is technically a type of mutual fund, is different from an MMA. A money market fund is an investment that holds short-term securities and isn’t insured by the FDIC. For example, these funds may hold government bonds, municipal bonds, and corporate bonds, as well as cash and cash equivalents.

An MMA is essentially a type of high-yield savings account, and it’s FDIC-insured up to $250,000.

How Does a Money Market Within Your IRA Work?

If you’re starting a retirement fund that has a money market component, you’ll want to make sure you understand how these accounts work. One major way they differ from regular MMAs is that they are governed by a retirement plan agreement.

This can place some limits on what you can do with the money. Typically, that’ll mean that you can’t withdraw the money until you have reached a certain age. But one advantage is that the money in the account will grow tax-free or tax-deferred (depending on what type of retirement account it’s in).

For example, an MMA in a Roth IRA would follow different rules than one in a traditional IRA.

•   You can deduct contributions to a traditional IRA, but a Roth IRA is funded with after-tax money.

•   You can’t withdraw money from a traditional IRA until you’re 59½, except under special circumstances.

•   Because contributions to a Roth IRA are post-tax, you can withdraw your contributions at any time (but not the earnings).

Advantages of a Money Market Account Held Within a Retirement Account

•   Since these accounts are held at a bank, they’re insured by the FDIC up to $250,000. By contrast, money held in a brokerage account is not FDIC-insured.

•   The money market component can be used to store proceeds of the sales of stocks, bonds, or other investments.

•   Many MMAs offer the ability to write checks against the account (just keep in mind that withdrawals are subject to restrictions).

Disadvantages of a Money Market Account Held Within a Retirement Account

•   MMAs offer a relatively low rate of return compared to what you might be able to earn in the market over time.

•   Opening this type of MMA requires opening a retirement account.

•   You may not be able to withdraw money until retirement age without paying a penalty.

Money Market Account Within a Retirement Account vs Traditional Money Market Account

The biggest difference between an MMA that’s part of a retirement account vs. a traditional MMA is where they are held. Unlike a regular MMA, the money market component is held inside a retirement account, such as a 401(k) or IRA.

While you can generally access money in a traditional MMA at any time, early withdrawal from a money market that’s part of a retirement account can trigger taxes and penalties.

Recommended: What is an IRA and How Does it Work?

What Should I Know About Money Market Accounts Held Within IRAs?

If you’re wondering how to save for retirement, there are a few things to keep in mind before opening a retirement account with a money market component.

The most important thing is that money put into the money market component is subject to the same conditions as any other money you invest into a retirement account. You generally won’t be able to access it without penalty until you retire.

You’ll also want to bear in mind that these are low-risk, generally low-return accounts. The money that you deposit or money that is automatically transferred isn’t going to provide much growth.

In some cases, when you open a retirement account, the funds will be automatically deposited in the money market component. In these instances, be sure to check that the money in that part of your account is then used to purchase the securities you want. Given the relatively low yield of an MMA, you may only want a certain portion of your savings to remain there.

Opening a Money Market Account That Is Part of an IRA

If you want to put some of your retirement savings in an MMA, you likely won’t be able to open the account separately, as you can with a traditional MMA.

Instead, you would open a retirement account with your bank, brokerage firm, or company provider. Depending on your IRA custodian, they may automatically include a retirement MMA as an investment option in your IRA.

Does It Make Sense to Put Retirement Funds in a Money Market?

There are many different types of retirement plans, so you’ll want to make sure to choose the options that make the most sense for you. While it might make sense to put some money into the money market component of your 401(k) or IRA, you might not want to put much money in it.

The reason for this is due to the relatively low interest rate that MMAs pay. In some cases, the interest rate may be lower than the rate of inflation. If so, the money kept in the money market component will lose purchasing power over time.

The one exception to this rule is retirees currently living off the money in their retirement accounts. These investors already in retirement will often want to keep some of their money in MMAs so they have to worry less about market volatility.

Alternatives to Money Market Accounts Held Within Retirement Accounts

There are a number of low-risk alternatives to MMAs, both within retirement accounts and outside them, such as a high-yield savings account. For similar alternatives within a retirement account, you could consider investing in bonds, bond funds, and other lower-risk investment options.

The Takeaway

An MMA is often a component of a retirement account, such as an IRA or 401(k). This type of account has the advantages of being FDIC-insured and fairly liquid. However, it may not earn enough interest to outpace inflation. Many investors will want to keep the money in their retirement accounts in investments that can provide higher rates of return. That said, one advantage of keeping some of your retirement funds in a money market is that it can be part of the low-risk cash/cash equivalents portion of your portfolio.

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FAQ

Can you keep some of your retirement funds in a money market account?

Yes, some retirement accounts offer a money market component. To keep some of your retirement savings in a money market account, you’ll need to open up an individual retirement account (IRA), 401(k), or other type of retirement account. Many retirement account custodians will include a money market account as one “investment” option for your account.

What is the difference between an IRA and a money market account?

A standard money market account is similar to a regular savings account. An Individual Retirement Account (IRA) is an account that allows you to save for retirement with tax-free growth or on a tax-deferred basis. An IRA can be used to invest in a variety of ways, and many IRAs will have a money market component to them.

What is the difference between a money market account and a 401(k)?

A money market account is similar to a savings account in that the money is liquid and earns interest. A 401(k) is a special tax-advantaged account designed to help people prepare for retirement.

With a 401(k), contributions are typically tax-deductible, and the money grows tax-deferred until retirement. You fund a money market account with after-tax dollars, and there are no tax benefits associated with these accounts. The only exception is if the money market account is a component of a retirement account. In that case, it’s governed by the rules of the retirement account it’s in.

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