A money market account combines the features and benefits of a savings account and a checking account, allowing convenient access to your deposits while earning more interest than a traditional checking account. While the average interest rate, according to CNET partner site Bankrate, is 0.13% for an MMA, it is possible to find rates 15 times higher in some banks or credit unions. Unlike savings accounts, an MMA limits the number of withdrawals per month – traditionally capped at six – and pays a tiered rate based on the account balance. The higher the balance, the more interest your account will earn.

Brief Overview of Money Market Accounts

Money market accounts were created in the 1970s by Henry BR Brown, an engineer turned fund manager, and his assistant, Bruce Brent. They developed the MMA concept as a means of attracting small investors and bypassing large investment requirements to access the higher rates available for Treasuries. Back then, the minimum investment requirement started at $100,000, leaving most small investors out. He pooled smaller accounts from multiple investors to achieve higher investment minimums, creating the reserve fund.

Fast forward 50 years to today to see that MMAs are well-known financial products offered by most banks and credit unions. They earn variable interest, the market rate – hence the name “money market”. These accounts are considered safe investments because they are insured by the Federal Deposit Insurance Corporation if offered by a bank, or by the National Credit Union Administration for credit unions, for amounts up to $250,000 .

How a Money Market Account Works

A money market account is a type of savings account that offers features typically associated with a checking account. Many MMAs have a higher minimum deposit requirement to open than a savings account and limit the number of withdrawals allowed per month. Like a checking account, a money market account offers owners the ability to access funds through debit cards or checks.

The interest earned on an MMA is variable – this means that it fluctuates in reaction to market conditions. As the Federal Reserve changes the benchmark federal funds rate, banks increase or decrease the interest offered on deposit products. Additionally, a money market account may also offer a tiered rate, meaning the higher the balance in the account, the higher the interest rate applied to the balance.

In exchange for the higher interest rate, a money market account limits access to available funds. Prior to 2020, the Federal Reserve limited the number of trades on MMA to a total of six trades per month. Although the regulations have been changed to remove this limitation, many banks still impose the restrictions.

How to Open a Money Market Account

Opening a money market account is a simple process.

  1. Compare features of money market accounts to ensure you select the account with the most favorable benefits. Features, benefits and restrictions vary by industry. You will want to take note of:
  • Interest rates offered
  • Minimum deposit required
  • Minimum monthly balance required to avoid service charges
  • Limitations on Access to Funds

2. Once you have selected a bank or credit union, complete an application.

3. Verify your identity.

4. Fund the account with at least the minimum initial deposit required.

How is a money market account different from a savings account or certificate of deposit?

A money market account differs from a traditional savings account in two main ways:

  1. A money market account offers debit card access and check writing privileges as a method of accessing deposited funds. Savings accounts typically offer electronic transfer access or an ATM card. Debit cards differ from ATM cards in that they can be used at payment terminals.
  2. A money market account also generally limits the number of times money can be transferred or withdrawn per month and requires a minimum balance to avoid monthly service charges.

There are also several differences between a money market account and a certificate of depositor CDs.

  1. A CD is purchased with terms generally from three months to five years. However, some banks offer shorter or longer terms.
  2. A CD is designed to encourage medium to long term savings. A CD limits access to deposited funds by imposing an early withdrawal penalty if the money is retrieved before the expiry of the maturity date.
  3. A traditional CD does not allow additional funds to be deposited into the account once it is established. A money market account does not limit additional deposits after opening the account.

What is the difference between a money market Account and a money market funds?

A money market fund is a type of mutual fund that invests in short-term debt securities like government bonds, cash, and cash equivalents. Investors buy stocks and earn returns in the form of capital gains. Money market funds are considered low-risk investments, but they are not FDIC-insured.

Are money market accounts safe?

A money market account is considered a safe, low-risk investment provided it is issued by an FDIC- or NCUA-insured bank or credit union, respectively, up to $250,000.

How to Choose the Best Money Market Account

When opening an MMA, there are several features to compare before deciding which one is best.

  • What are the minimum deposit requirements? This will help you decide if an account will work with your savings budget. Also note any minimum balance required to avoid service charges. Such service charges will reduce profit growth and should be avoided where possible.
  • What interest rate does the account earn? It is important to research accounts nationwide to find the best rates available. With the prevalence of online banking options, geographical limitations are not necessarily a barrier to finding the highest interest rates.
  • Take note of any fees associated with the account. It’s important to understand all fees and restrictions that may result in penalties to ensure that your account growth is not compromised.

Advantages and disadvantages of a money market account

Advantages

  • A money market account is considered a low risk investment because it is insured for up to $250,000 by the FDIC or NCUA which may pay a higher interest rate than traditional savings accounts.
  • It provides debit card and check access to deposited funds.
  • Additional money can be deposited at any time.
  • Higher balances earn higher interest rates for accounts that operate on a tiered model.
  • Most banks and credit unions offer MMA through digital banking so accounts and benefits can be compared nationwide to locate the best deals.

The inconvenients

  • Transactions are generally limited to six per month. Under the excessive trading rule known as Regulation D, most MMAs are limited to six withdrawals per month (which extends to overdraft protection transactions, third-party payments, electronic transfers and telephone and ACH withdrawals). Regulation D was suspended in 2020 and some banks removed these withdrawal limits; However, some banks still charge fees for exceeding withdrawal limits.
  • A money market account has higher initial deposit requirements than savings accounts.
  • Service charges may be imposed if balances fall below a target level.

The bottom line

Money market accounts share common features with savings accounts and checking accounts. They generally offer higher interest rates than checking accounts, but offer debit card and check access to deposited funds. Money market accounts are best for savers who are looking for safe, low-risk savings options and who have enough money to meet the higher initial deposit requirement. These accounts are best for short-term savings for those who don’t need to make many monthly withdrawals.