Should I Use a Money Market Account for 401k Instead of Regular Distributions?

Money market accounts may offer safety, but their returns are low.

Money Markets Provide Flexibility

Money markets ensure you won't need to withdraw money from risky funds.

A bank's money market account is a convenient place to put 401k funds, keeping your money safe and accessible when you need it. This prospect allows you to leave your longer-term investments to grow. Volatility in the stock market makes moving stocks around over the short term a dangerous strategy.

Money Markets Usually Don't Beat Inflation

Money market rates rarely keep up with the rising price of goods.

According to CNN Money, inflation is the biggest risk to long-term investments. The Saint Louis Federal Reserve Bank predicts that interest rates will average 4 percent per year up to around the year 2060, and money market rates of return rarely exceed inflation. Taking money directly from your funds allows you to stay invested with all of your money.

Bottom Line

A small money market may be a good approach to withdrawing funds.

Although they don't typically earn high returns, a small money market account gives you a safe place for 401k funds you don't want to put into riskier investments. Keeping only minimal dollars in the money market account will allow you to leave the majority of your money invested in places where you're more likely to outpace inflation.

References

• CNNMoney: Money 101 Lesson 4: Basics of Investing
• Federal Reserve Bank of St. Louis: Monetary Trends