A retirement Money Market is interest-bearing savings account within a retirement account, such as an individual retirement account (IRA) or Roth IRA, known as a retirement money market account.
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Retirement Money Market Account Definition
Having the capacity to make purchases or write checks is one of the characteristics of a money market account, which also offers high-interest rates on savings and checking deposits. A retirement money market account is one that is included within a retirement account.
A retirement money market account may receive funds before they are deposited into a retirement investment account, such as an IRA. Deposits are made in low-risk assets that might only marginally outperform savings accounts in terms of yield. But the fact that the money is reliable and accessible is a plus.
Retirement money market accounts have many of the same tax benefits as retirement savings accounts, which is a substantial advantage over conventional money market accounts. Depending on the type of retirement account, your payments can be tax deductible and investment gains might increase tax-free.
Contrarily, when contributions to a standard money market account are paid with after-tax money, you don’t receive a tax benefit upfront and must pay taxes on the interest you earn. On the other side, a disadvantage of retirement money market accounts is that they are subject to IRS rules for retirement savings vehicles, which regulate when you can withdraw the money and any penalties or taxes due, for example, if you take an early distribution.
What Is the Process for a Retirement Money Market Account?
According to a former financial advisor and personal finance expert Kevin L. Matthews II, it might be the simplest to think of a retirement money market account as a parking lot for your money. The Balance spoke with Matthews by phone. “It’s a piece of a retirement account that pays you a little bit of interest while you determine how you want to invest the money.” It’s preferable to hide cash under the bed.
A retirement money market account is designed for short-term cash storage. However, Matthews cautioned that some people make the error of not investing their money and instead choose to leave it in a retirement money market account. People will contribute as much cash as they can, but it will just sit there, he claimed. It isn’t making as much money as it would in one of those funds.
Make sure your cash contributions to retirement accounts, such as IRAs, are being invested and not merely lying idle in retirement money market accounts. You’ll have a better chance of earning the income you’ll need in retirement if you do this since your money will have a chance to increase over time.
An investment strategy for retirement should generally seek to outperform inflation, which is predicted to average 2.4% over the coming ten years. 1 In contrast, over the past ten years, interest rates on money market accounts have decreased. According to data from the FDIC, the typical interest rate on money market accounts now is about 0.08% APY. 2 As a result, it’s doubtful that money held in a retirement money market account will grow faster than inflation. In other words, you may have a worse chance of achieving your retirement savings objectives if you let your money sit around uninvested.
Is a Retirement Money Market Account Necessary?
Depending on the type of retirement account you choose, as well as the bank or investment company you choose, you may or may not require a retirement money market account. For instance, if you open a Roth IRA with Vanguard and start contributing on a regular basis, those funds might be transferred automatically into a retirement money market account. That money will stay there until you actively decide which Vanguard investment funds to invest in and transfer funds to your Roth IRA.
A retirement money market account can help you if you’re close to retiring by giving you a safe, stable, and liquid way to store your money. You can keep the money from selling investments that will provide retirement income in your retirement money market account, where they will continue to collect interest. Additionally, a retirement money market account makes it simple for you to write checks when you’re ready to spend the money, giving you quick access to your cash when you need it.
If you find that you have money in a retirement money market account in the interim, you can decide to invest it all at once. By email, Matthews explained to The Balance that the IRS annual contribution thresholds, which place a cap on the annual contributions you can make to your retirement accounts, don’t apply to investments made using money that has already been deposited.
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Important conclusions
A retirement money market account is a high-yield, interest-producing savings account inside of a retirement investment vehicle.
When money is deposited into a retirement money market account, it remains there until it is utilized to buy securities like mutual funds, stocks, and bonds.
A money market fund is distinct from a retirement money market account. A money market account’s FDIC insurance is one of the key differences between it and a money market fund.
