What Is a Retirement Money Market Account?

Definition of a Retirement Money Market Account

A money market account is a high-interest savings account that includes checking account features, such as the ability to make purchases or write checks. A money market account inside of a retirement account is considered a retirement money market account. 

Money deposited into a retirement investment account, such as an IRA, may first land in a retirement money market account. 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.

Unlike regular money market accounts, a big perk of retirement money market accounts is they enjoy many of the same tax advantages of retirement savings accounts. Your contributions may be tax-deductible and investment earnings may grow tax-free, depending on the type of retirement account.

In contrast, contributions to a regular money market account are made with after-tax dollars, so you don’t get an upfront tax break, and you have to pay taxes on the interest you earn. On the other hand, a drawback of retirement money market accounts is that they are subject to IRS rules for retirement savings vehicles, which govern when you can withdraw the money and any penalties or taxes due if you take an early distribution, for example. 

How Does a Retirement Money Market Account Work?

It may be easiest to think of a retirement money market account as a parking lot for your cash, according to former financial advisor and personal finance author Kevin L. Matthews II. “It’s a portion of a retirement account that gets you a little bit of interest while you decide how you want to invest the money,” Matthews told The Balance by phone. “It’s better than leaving money under the mattress.”

The purpose of a retirement money market account is to store cash on a temporary basis. However, Matthews noted that some people make the mistake of leaving money in a retirement money market account rather than investing it. “People will pour in as much money as they can, but it's sitting there,” he said. “It’s not earning as much as it would in one of those funds.”

If you’ve been saving money in a retirement account like an IRA, make sure your cash contributions are being invested, not just sitting idly in a retirement money market account. That way, your money has a chance to grow over time, giving you a better chance of creating the income you need in retirement.

A general rule of thumb for retirement investing is that you should at least aim to outpace inflation, which is expected to average around 2.4% over the next  decade. By comparison, money market account interest rates have declined over the last 10 years. Today, the average money market account interest rate is around 0.08% APY, according to FDIC data. Therefore, it’s pretty unlikely that money left languishing in a retirement money market account will outpace inflation. In other words, if you let your cash sit there uninvested, you may be less likely to reach your retirement savings goals.  

Do I Need a Retirement Money Market Account?

Whether or not you need a retirement money market account depends on the type of retirement account and which bank or investment firm you decide to go with. For instance, if you open a Roth IRA with Vanguard and begin making regular contributions, those dollars may automatically be deposited into a retirement money market account. That cash will remain there until you actively choose investment options from Vanguard’s investment fund lineup and direct money into your Roth IRA.

If you’re nearing retirement, a retirement money market account can benefit you by providing a place to keep your cash that’s both liquid and stable. As you sell investments to generate retirement income, you can store the proceeds in your retirement money market account, where they’ll continue to earn interest. And when you’re ready to spend the money, a retirement money market account makes it easy for you to write checks, giving you easy access to your cash as needed.

In the meantime, if you discover that you have money in a retirement money market account, you can invest it all at once, if you choose. Matthews told The Balance by email that IRS annual contribution thresholds, which limit the amount you can deposit into your retirement accounts each year, don’t restrict how much you can invest of money that’s already been deposited.