how a retirement money market account works
a retirement money market account is meant to be a temporary holding point for cash you move into the account before it s invested in securities with greater potential for returns the deposits are invested in low risk investments that may pay only slightly better than a savings account but the benefit is that the funds are stable and liquid the downside is that the return on such an account tends to be very low compared with equity investments or even less liquid fixed income investments 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 1 that means for example that you may not be able to withdraw money from the account without paying a penalty until you have reached a minimum age such as 59 2 as a benefit however the account balance may be allowed to grow tax free 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 is expected to remain stable regardless of how the stock or bond markets perform regular savings accounts on the other hand with often lower rates give you the advantage of easier access to money should you 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 3 some of the best money market accounts may pay higher interest rates than regular savings accounts for example in june 2023 the money market account interest rates ranged from 4 00 to over 5 00 apy money market funds are mutual funds that are offered by brokerages investment companies and financial services firms they pool money from multiple investors and invest in high quality short term securities their funds are easily accessible 4 while money market accounts sound similar and people often confuse the two they are actually closer to savings accounts money market accounts are on demand interest bearing accounts that are held at a bank or credit union 5 both types of accounts are recommended components of an overall retirement savings plan advantages and disadvantages of a retirement money market accountunlike stocks and bonds money market account balances held at a bank are fdic insured up to 250 000 per depositor per institution 6in 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 sometimes 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 your balance effectively shrinks each year in terms of its purchasing power it s critical not to get complacent and leave cash in a retirement money market account for too long because the funds should be invested for optimum returns to boost your retirement savings penalty free withdrawals generally aren t allowed from retirement money market accounts until you reach age 59 2part of a retirement savings strategymost people don t know how much money they ll actually need for their retirement not saving enough means not being able to afford a certain lifestyle and it also means you ll have to work longer which may not be feasible short term investments such as high yield 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 lower returns but because they are easily liquidated you can rely on them for immediate needs such as a car or a family emergency consider putting your money saved 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 investments that may be good for the medium term anywhere from two to seven years include stocks and bonds by investing via 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 isn t good and when a big goal is approaching such as college for your children or your own retirement you can shelter some of this money in regular 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 in addition you should consider opening 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 it s a great way to invest pretax money and your employer may match part or all of your savings long term investments give you more time to recover from market losses 