How Do Money Market Accounts Work?

Banks offer a variety of options for our everyday banking needs and to help us save. While one option—the checking account—gives us the ability to make deposits, multiple cash withdrawals, make purchases, write checks, and do transfers, the savings account gives us a risk-free place to put our cash while the balance collects interest.

But is there a happy medium? There is one type of account that offers the best of both worlds: The money market account. But just what exactly is this type of account and how does it work?

Key Takeaways

  • A money market account is neither a checking nor a savings account but has certain characteristics similar to both.
  • Money market accounts allow account holders to make withdrawals, transfers, and debit card transactions like regular checking accounts.
  • MMAs offer higher interest rates than traditional savings accounts.
  • Prior to April 24, 2020, savings deposit accounts were limited to six withdrawals per month under Regulation D. This limitation has since been removed.

A Short History of Money Market Accounts

Banks created money market accounts (MMAs) to offer more competitive interest rates than those offered by traditional savings accounts. But that doesn't come without a cost. The tradeoff for higher rates is often a higher minimum deposit requirement.

With many MMAs, the account has to maintain a minimum daily balance to receive the highest available interest rate. Many MMAs have tiered savings levels that offer higher interest rates for higher levels of savings.

MMAs became popular during the 1980s, when interest rates rose into the double digits, giving depositors an opportunity to generate high, risk-free returns. Investing deposits for MMAs are often held in vehicles such as certificates of deposit (CDs), government securities, and commercial paper that offer higher yields than are generally found in savings accounts.

Checking or Savings?

There tends to be some confusion about what a money market account actually is. An MMA is neither a checking nor a savings account. But it does have certain characteristics that are similar to both. Money market accounts usually offer higher yields than savings accounts.

They are able to offer a more attractive interest rate by setting higher minimum balance requirements, and through possible restrictions on the number of withdrawals that can be made over a given period of time.

The purpose of Regulation D in limiting withdrawal transactions was to help banks meet their reserve requirements.

Similarities to Checking Accounts

MMAs are deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC). They are offered by banks, credit unions, and other financial institutions like those that operate online. An MMA has several benefits that offer benefits that resemble a checking account.

First, some money market accounts offer debit cards. This allows account holders to make cash withdrawals or purchases at retailers using the card. If the institution offers online banking privileges, customers can also make transfers and pay bills the same way they would with a checking account.

Savings Element

While it has some elements of a checking account, the main point of an MMA is the savings portion. This means the account balance earns interest. Unlike a traditional savings account, account holders generally enjoy a higher rate. Many MMAs offer interest based on a tiered balance; lower balances get a lower rate, while higher balances are rewarded with more interest.

Institutions can justify the higher interest rate by putting a minimum balance requirement. If the account holder's balance goes under this amount, the bank may be able to cut the high-interest rate down. Banks can also charge fees for not meeting the minimum balance.

Money market accounts may come with withdrawal limits. Prior to April 24, 2020, as stipulated by the Federal Reserve's Regulation D, savings deposit account-holders were limited to six withdrawals per month. If more than six withdrawals were made, an account could be charged a penalty. This limitation has since been removed but some banks may still place limits on withdrawals.

Can You Lose Money in a Money Market Account?

You cannot lose money in your money market account. Money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) if the account is at a bank and by the National Credit Union Administration (NCUA) if the account is at a credit union.

Is It Worth It To Put Money in a Money Market Account?

It can be worth putting money into a money market account depending on the needs of the specific individual. A money market account will come with a higher interest rate than a traditional savings account, allowing the account holder to earn more money on their deposits. Money market accounts have easier access when compared to traditional savings accounts and are also protected by either the FDIC or NCUA. Money market accounts, however, do come with higher minimum balance requirements that need to be maintained.

What Is the Difference Between a CD and a Money Market Account?

A money market account offers the benefits of both a checking account and a savings account: easy access to funds and interest earned on deposits. A certificate of deposit on the other hand ties up cash for a certain period of time, making the money inaccessible to the account holder.

The Bottom Line

Money market accounts are suitable for those who can meet the higher minimum balance requirements in order to earn a higher interest rate on savings when compared to traditional savings accounts.

Article Sources
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  1. Federal Reserve System. "Regulation D Reserve Requirements," Page 3.

  2. Federal Register. "Regulation D: Reserve Requirements of Depository Institutions."

  3. Federal Reserve System. "Regulation D Reserve Requirements," Page 1.

  4. Federal Deposit Insurance Corporation. "Are My Deposit Accounts Insured by the FDIC?"

  5. National Credit Union Administration. "Share Insurance Fund Overview."