Can You Move a 401(k) to a Money Market Account?

A 401(k) is a valuable retirement savings tool, but there are times when you may want to move funds into a more stable option like a money market account. Whether due to market volatility or a need for short-term liquidity, understanding when and how to make this transition is essential.

Certain rules govern 401(k) transfers, and not all plans allow direct movement into a money market account. Understanding the process, restrictions, and potential consequences helps ensure an informed decision while avoiding penalties or tax implications.

Rollover Eligibility in a 401(k)

Moving funds from a 401(k) depends on employment status, plan rules, and IRS regulations. Rollovers are typically allowed when leaving a job, retiring, or if the plan permits in-service withdrawals. Each situation has different requirements that affect how and when funds can be transferred.

If you’ve left an employer, you can usually roll over your 401(k) into an IRA or another employer-sponsored plan. The IRS allows this tax-free if completed within 60 days, provided it’s a direct rollover where funds move between accounts without passing through your hands. With an indirect rollover—where you receive the funds first—20% is withheld for taxes. If the full amount isn’t redeposited within the deadline, the difference is considered a taxable distribution.

For those still employed, accessing 401(k) funds is more restrictive. Some plans allow in-service rollovers, but policies vary. Even if permitted, restrictions may apply based on age or contribution type. The IRS allows penalty-free withdrawals after age 59½, but early distributions generally incur a 10% penalty unless an exception applies, such as financial hardship or certain medical expenses.

Distinguishing Money Market Options

When considering a money market option, it’s important to distinguish between money market funds and money market deposit accounts.

Money market funds are mutual funds investing in short-term, high-quality debt securities like Treasury bills and commercial paper. These funds are regulated by the Securities and Exchange Commission (SEC) under Rule 2a-7 of the Investment Company Act of 1940, which imposes liquidity and credit quality requirements. However, they are not insured by the Federal Deposit Insurance Corporation (FDIC), meaning there is some risk of loss.

Money market deposit accounts, offered by banks and credit unions, are FDIC-insured up to $250,000 per depositor, per institution. While they generally offer lower yields than money market funds, they provide a stable place to hold cash with easy liquidity.

Liquidity and accessibility differ between these options. Money market funds typically allow withdrawals, but redemption restrictions may apply during market stress. Some funds impose liquidity fees or temporary redemption gates if net asset values fall below regulatory thresholds. Money market deposit accounts generally permit up to six withdrawals per month under federal Regulation D, though this rule was suspended in 2020, and many banks have since removed withdrawal limits.

Tax treatment is another factor. Earnings from money market funds are subject to capital gains taxes if shares are sold at a profit, and interest income is taxed as ordinary income. Some funds invest in municipal securities, which may offer tax-exempt income depending on state and federal laws. Interest earned on money market deposit accounts is always taxed as ordinary income.

Steps to Move Funds

Transferring 401(k) funds to a money market account requires careful planning to comply with tax laws and financial regulations. The first step is determining whether your 401(k) plan allows direct transfers or if a rollover into an intermediary account, such as an IRA, is required. Many employer-sponsored plans do not permit direct withdrawals into personal bank accounts, so moving funds to an IRA first can provide greater flexibility.

Choosing between a traditional or Roth IRA is important, as moving pre-tax 401(k) funds into a Roth IRA triggers immediate tax liability on the transferred amount.

Once the receiving account is selected, initiating the transfer involves submitting a distribution request to the 401(k) plan administrator. This typically requires filling out a form specifying the type of rollover and destination account details. Some providers offer electronic processing, while others require physical paperwork and notarized signatures. Ensuring accuracy in account information prevents delays or misdirected funds. If a check is issued instead of a direct transfer, it must be deposited into the new account within 60 days to avoid taxation and penalties.

After the transfer, confirming the transaction with both the sending and receiving institutions helps prevent discrepancies. Reviewing account statements ensures the correct amount was transferred and that no unexpected fees were deducted. Some financial institutions charge processing fees for rollovers, which should be considered when selecting where to hold the funds. If the money is placed into a money market fund within an IRA, monitoring the fund’s performance and associated expense ratios is important for managing returns.

Employer’s Role in the Process

Employers act as fiduciaries in 401(k) transfers, ensuring compliance with the Employee Retirement Income Security Act (ERISA) and IRS guidelines. They oversee recordkeeping, verify participant requests, and coordinate with plan administrators to execute transfers. If a company uses a third-party administrator (TPA) or a bundled service provider, the employer still retains oversight responsibilities.

Employers also set plan-specific conditions that impact fund movement. While federal regulations provide a framework, individual plans may impose additional restrictions, such as blackout periods during administrative changes or company mergers. These temporary freezes prevent participants from making transfers or withdrawals, delaying access to funds. Employers must provide timely notice of any such restrictions.

Some employers offer in-plan options that provide liquidity without requiring an external transfer. This could include stable value funds, which aim to preserve capital while offering higher yields than traditional money market funds. Understanding these alternatives may help employees find a suitable solution within the existing plan, avoiding the complexities of a rollover.

Documentation to Keep

Keeping thorough records ensures compliance with tax regulations and provides proof of the transaction in case of discrepancies. The IRS requires documentation to verify that a rollover was completed correctly, and financial institutions may request records to resolve any issues.

Essential documents include the distribution statement from the 401(k) provider, detailing the amount withdrawn, type of distribution, and any taxes withheld. If a direct rollover was performed, a confirmation letter from the receiving institution should also be retained. For indirect rollovers, keeping a copy of the deposit receipt and ensuring the transfer was completed within the 60-day window helps avoid penalties.

Additionally, Form 1099-R, issued by the 401(k) provider, and Form 5498, provided by the receiving institution, should be stored for tax reporting. These forms document fund movement and ensure accurate tax filings.

Beyond tax-related paperwork, maintaining a copy of the original 401(k) plan documents and correspondence with the plan administrator is useful. Some plans have unique rollover provisions, and having written confirmation of allowed transactions helps protect against administrative errors. If a money market fund within an IRA is chosen as the destination, reviewing the fund’s prospectus and fee structure provides insight into costs and investment risks. Keeping these records organized simplifies future financial decisions and provides clarity in case of an audit or dispute.