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Guide to a Retirement Money Market Account

By Dan Miller · June 17, 2022 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Guide to a Retirement Money Market Account

A retirement money market account is similar to a savings account where the money is liquid and earns a low interest rate. But a retirement money market account is held within a retirement account such as an IRA or 401(k), and is subject to the benefits and restrictions of those accounts.

While you might have most of your money in higher-return investments, it may also make sense to keep some funds in a retirement money market account. A retirement money market account, like a standard money market account, is a relatively low-risk place to store cash. Even if the return is lower than other investments, it’s predictable.

Another reason to have a retirement money market account is a holding place as you sell investments or transfer money between investments. Here’s what else you need to know about retirement money market accounts.

Recommended: What is a Money Market Account

What Is a Retirement Money Market Account?

As the name suggests, a retirement money market account is a type of money market account that is held inside a retirement account. The money market account could be within a traditional, rollover, or Roth IRA, a 401(k), or other retirement account, which means those funds are governed by the rules of that account.

So the deposits you make may be tax deductible and may grow tax free, but depending on the type of retirement account you might not be able to withdraw funds before age 59 ½ without paying a penalty.

Money in the retirement money market account is liquid. It’s usually where money is held when you first transfer money into your retirement account, or when you sell other investments in your account. You can use the funds in the money market to purchase investments within the retirement 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 a money market account. A money market fund is an investment that holds short-term securities (and is not FDIC insured). For example, these funds may hold government bonds, municipal bonds, corporate bonds, cash and cash equivalents.

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

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How Does a Retirement Money Market Account Work?

If you are starting a retirement fund, you’ll want to make sure that you understand how retirement money market accounts work. One big difference from a regular money market account is that money in a retirement money market account is governed by a retirement plan agreement.

This can place some limits on what you can do with the money in a retirement money market account. Typically, that will mean that you can’t withdraw money held in your retirement money market account 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 is in).

For example, a money market account in a Roth IRA would follow different rules than money in a 401(k).

•   You can deduct contributions to a 401(k), but a Roth IRA is funded with after-tax money.

•   You can’t withdraw money from a 401(k) until you’re 59 ½, except under special circumstances.

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

Advantages of a Retirement Money Market Accounts

•   Money is typically insured by the FDIC up to $250,000.

•   Can store proceeds of the sales of stocks, bonds, or other investments.

•   Many retirement money market accounts offer the ability to write checks against the account.

Disadvantages of a Retirement Money Market Accounts

•   Pays a low interest rate that may not keep up with inflation.

•   Requires a separate retirement account.

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

Retirement Money Market Account vs Traditional Money Market Account

The biggest difference between a retirement money market account vs. a traditional money market account is where they are held. A retirement money market account is held inside a separate retirement account, such as a 401(k) or IRA account. A traditional money market account is usually held at a bank or credit union.

While you can access money in a traditional money market account at any time, you may not be able to access the money in a retirement money market account until you retire. It depends on the type of account.

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

How Does a Retirement Money Market Account Differ From an IRA Account?

While you might think of an IRA as a type of investment account, it may be more accurate to think of an IRA as a collection of various types of investments. You can use your IRA to invest in stocks, bonds, options, real estate, cryptocurrency, and so on.

A retirement money market account is one type of investment that you can have in your IRA. Money in a retirement money market account inside your IRA, for example, can be used for daily living expenses in retirement or as a holding place as you move money between different types of other investments.

In terms of your asset allocation, funds in a money market are considered cash or cash equivalents. This can help balance your holdings that are more volatile.

What Should I Know Before Opening a Retirement Money Market Account?

If you are wondering how to save for retirement, there are a few things that you should know before opening a retirement money market account.

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

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

In some cases, a retirement account might come with a money market account within it, and funds may be automatically deposited there. 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 low yield of an MMA, you only want a certain portion of your savings to remain there.

Opening a Retirement Money Market Account

In most cases, you won’t open a retirement money market account separately, as you might with a traditional MMA.

Instead, you would open a retirement account with your bank or company provider. Depending on your IRA custodian, they may automatically include a retirement money market account as an investment option inside your IRA account.

Is a Retirement Money Market Account Right for You?

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 makes sense to have a retirement money market account inside your 401(k) or IRA, you might not want to put much money inside of it.

The reason for this is due to the relatively low interest rate that retirement money market accounts pay. In most cases, the interest rate will be lower than the rate of inflation, so money kept inside of a retirement money market account will lose purchasing power each year.

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

Alternatives to Retirement Money Market Accounts

There are any number of low-risk alternatives to retirement money market accounts, including vehicles outside a retirement account, such as a high-yield savings. For similar alternatives within a retirement account, you could consider investing in bonds, bond funds, and other options that might provide a steady return, but with a lower risk profile.

The Takeaway

A retirement money market account is similar to a savings account, but it is held inside a retirement account such as an IRA or 401(k). While a retirement money market account has the advantages of being FDIC-insured and fairly liquid, it also doesn’t pay very high interest rates. Most investors will want to keep the money in their retirement accounts in investments that provide higher rates of return, although one advantage of a retirement money market account is that it can become part of the low-risk, cash/cash equivalents part of your portfolio.

Money market accounts are just one option for a secure, steady rate of return. If you’re looking for great interest rates while having flexible access to your money, consider SoFi’s all-in-one high yield bank account. Eligible account holders can earn 1.50% APY if you sign up for direct deposit.

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FAQ

What does a retirement money market account require?

A retirement money market account is a type of money market account that is held inside a retirement account, e.g. an IRA or 401(k). You’ll need to open up an IRA or other type of retirement account to have a retirement money market account. Most IRA custodians will include a money market retirement account as one investment option for your IRA.

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

A standard money market account is a liquid investment similar to a savings account. An Individual Retirement Account (IRA) is a tax-deferred account that can be used to invest in a variety of different ways. A money market account inside of an IRA or other retirement account is typically referred to as a retirement money market account.

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

A standard money market account is similar to a savings account in that the money is liquid and it pays a fixed rate of interest. A 401(k) is a tax-deferred account that acts as a vehicle for a wide range of investments. Contributions are deductible and the investor must pay taxes on withdrawals. A money market account is funded with after tax dollars, and there are no tax benefits associated with these accounts. A retirement money market account, however, obeys the rules of the retirement account it’s in.


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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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