What is a Money Market Account?
A money market account is an interest-bearing account with a bank or credit union, not to be confused with a money market mutual fund. Sometimes called money market deposit accounts (MMDA), money market accounts (MMA) have some features that are not found in other types of accounts. Most money market accounts pay a higher interest rate than regular passbook savings accounts and often include privileges for issuing checks and debit cards. They also have limitations that make them less flexible than a regular checking account. They are important for calculating net worth.
The lines between high-yielding savings accounts and money market accounts are becoming increasingly blurred, and you can compare both money market accounts and savings account rates to ensure you are choosing the best product for you.
How money market accounts work
Money market accounts are offered at traditional and online banks and credit unions. They have both advantages and disadvantages over other account types. Benefits include higher interest rates, insurance coverage, and check and debit card privileges. Banks and credit unions usually require customers to deposit a certain amount of money to open an account and that their account balances stay above a certain level. Many will charge a monthly fee if the balance falls below the minimum.
Money market deposit accounts also provide federal insurance coverage. Money market mutual funds usually do not. Bank money accounts are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government. The FDIC covers certain types of accounts, including MMA, up to USD 250,000 per depositor with each bank. If the depositor has other insured accounts with the same bank (checking, savings, certificates of deposit), they all count towards the $ 250,000 insurance limit.1
Joint accounts are insured for $ 500,000.2 For credit union accounts, the National Credit Union Administration (NCUA) provides similar coverage ($ 250,000 per member per credit union and $ 500,000 for joint accounts). 3 For depositors who wish to ensure more than $ 250,000, the easiest way to do this is to open accounts with more than one bank or credit union.
Potential downsides include limited transactions, fees, and minimum balance requirements.
Here’s an overview:
- Higher interest rates
- Insurance cover
- Check writing privileges
- Debit cards
- Limited transactions
- Minimum balance requirement
Money Market Accounts vs Savings Accounts
One of the advantages of money market accounts is that they offer higher interest rates than savings accounts. For example, in July 2020, their average interest rate was 0.08% and their average savings account was paying 0.06%. The highest rate on the money market account was 1.50%, and the highest rate on the savings account was 1.15% .4
When general interest rates are higher, as they were in the 1980s, 1990s and most of the 2000s, the gap between the two types of accounts will be wider. Money market accounts can offer higher interest rates because they are allowed to invest in certificates of deposit (CDs), government securities, and commercial paper, which cannot be done in savings accounts.
Interest rates in money market accounts are volatile, so they rise or fall with inflation. How this interest is compounded – yearly, monthly, or daily, for example, can have a significant impact on the depositor’s return, especially if they maintain a high account balance.
Unlike savings accounts, many money market accounts offer some check-issuing privileges and also provide a debit card with an account just like a regular checking account.
Money market versus current accounts
One potential disadvantage of money market accounts compared to checking accounts is that Federal Reserve Regulation D limits depositors to six transfers and electronic payments per month. Types of transfers affected: pre-authorized transfers (including overdraft protection), telephone transfers, wire transfers, checks or debit card payments to third parties, ACH transactions, and wire transfers. Contributors who exceed the limits may be fined. If they continue, the bank should revoke their transfer rights, transfer them to regular review, or close the account.5
However, depositors can make an unlimited number of transfers in person (at the bank), by mail, by courier, or through an ATM. They can also make as many contributions as they like.