As interest rates rise from historically low levels, it is easy to focus on the negative effects this may have, such as the added costs of borrowing money. There is a positive side to higher interest rates, however, and that’s the higher yields investors are able to earn in money market accounts. In addition, recent changes to Regulation D have now allowed several banking institutions to waive the limit on transactions and lower minimum balance requirements, making this type of account even more attractive. We take a look at exactly what a money market account is, how they work, and answer common questions to help you decide if this might be the right type of account for you.
How to Open a Money Market Account
Money market accounts are widely available at most banks and credit unions. Here are the steps you’ll need to take to open one.
Step 1: Choose a money market account that works for you. Choosing the money market account that is right for you is the most important step. As with any account, make sure that the account features, accessibility, and customer service offer what is essential to you. For example, opening an account that offers the highest interest rate is not necessarily the best option if it doesn’t offer a debit card, and that is a feature that you will need.
Step 2: Prepare the necessary documents. In order to open any account at a bank you will need certain documentation to prove your identity. Make sure that you have gathered the correct documentation prior to your appointment or filling out your online application so the process goes smoothly.
Step 3: Make your first deposit. Depending on whether you open an account in person or online, you will need to make your first deposit. This can be done via a cash deposit or electronic funds transfer from another account that you already have.
|Provider||Best For||Key Benefit|
|Prime Alliance Bank||Best Overall||Competitive interest rate for any balance|
|Patelco Credit Union||Best for Small Balances||Higher APY for smaller balances|
|Axos Bank||Best for Debit Users||Full debit card access with no monthly fees|
|Ally Bank||Best for Ultimate Flexibility||Access your funds online, through ATM, debit, or Zelle|
|Synchrony Bank||Best IRA Options||Rollover an existing IRA to an IRA money market account|
What You Need to Open a Money Market Account
As with opening any account at a banking institution, there are certain requirements and things you need to know. Here’s an overview.
In order to open a money market account, you will need to fill out an application to establish a relationship with the banking institution. Typically, these institutions will gather information from you regarding the following:
- Full name
- Date of birth
- Social Security number
- Employment status
- Answer to security questions, such as your mother’s maiden name
- Government-issued ID, such as a driver’s license or Social Security card
Optional Account Information
- Whether you want to add a joint owner
- Whether you want to add a beneficiary
- If you want to receive checks to use with your account
- If you want to receive a debit card for use with your account
Historically, money market accounts required higher minimum deposits in order to open and maintain the account. However, with the more recent changes to Regulation D decreasing reserve requirements to zero, and growing competition with alternative and online banking options, many banking institutions have lowered the minimum deposit for these types of accounts. Each banking institution has its own requirements, so it is important to compare what features are offered by each bank before deciding which option is best for you.
Know The Basics
Money Market Accounts vs. Other Bank Accounts
While money market accounts are considered traditional deposit accounts by the FDIC, they do offer additional unique features, as compared with many conventional bank accounts at conventional banks.
High-Yield Savings Account
A high-yield savings account offers a higher interest rate than the current APY for a traditional savings account. While your money will earn a higher rate of interest, there may be fees associated with some account services, such as wire services or cashier’s checks. You also may not have access to your money right away–deposited funds may not be available for a few days, and likewise, when withdrawing funds, access could take a few days.
A checking account typically earns no interest, although some low-interest checking options are available. This type of account is very liquid, as money can be accessed easily through writing a check, using your debit card, or withdrawing cash from your bank or an ATM. Checking accounts are used primarily for daily purchasing activity or bill payment.
Certificate of Deposit (CD)
A certificate of deposit is an investment product which yields a higher interest rate than a savings account. But in order to earn the higher rate, you must invest in the CD for a specific number of months or years. Typically, the longer the term of the CD, the higher the rate of return. Another characteristic worth considering is that this type of account is not very liquid, in that you may incur a penalty or fees for withdrawing your money prior to the term of the CD.
Factors to Consider When Opening a Money Market Account
Before opening a money market account, it’s important to research the following factors to find which account will best suit your financial needs.
Annual percentage yield (APY): APY is the interest rate which your money will be earning– obviously, the higher the better. While many banks are moving away from requiring minimum deposits, you may be able to earn a higher interest rate if you have a substantial amount of money to deposit and you are able to maintain that larger balance.
Fees: Most banking institutions do not charge monthly fees. However, there may still be fees associated with account transactions. While Regulation D changes have allowed banks to lift limits on account transactions, many institutions may still charge a fee for transactions beyond six per month.
FDIC insurance: Because money market accounts are considered traditional deposit accounts by the FDIC, they are insured up to $250,000, just as any other deposit account at an FDIC bank. This can provide peace of mind for bank customers knowing that their money will be there, especially in unstable economic times.
Transaction limits: Recent changes to Regulation D has removed the six-per-month limit on transactions in deposit accounts. However, it has not required banks to do so. Each banking institution has the flexibility to implement the new changes as they wish. This may mean that some banks still limit account holders to only six monthly transactions, or may charge a fee for additional transactions beyond the initial six, for example. If you feel that you will need more than six monthly transactions, make sure you know where your banking institution stands on this policy before opening your money market account.
Check-writing privileges: With many banks that offer money market accounts being brokerage institutions or online banks,check-writing can be a convenient way to access your money or pay certain bills. Not all money market accounts offer this option, so make sure you know if this is a feature that will be available to you.
Banking options: If you plan on using your money market account like a bank account, to pay monthly bills or make debit card purchases, you will need to make sure that your account offers those options or if there are any fees associated with those types of transactions.
What Is a Money Market Account?
Money market accounts are a blend of a savings and checking account. This type of hybrid account incorporates the advantage of earning higher interest rates with the benefits of check-writing and debit card use. In a market of rising interest rates, it makes sense to utilize a money market account to earn additional interest on savings and checking balances.
Historically, money market accounts have mandated higher minimum balance requirements and limited transactions to only six per month, which made this type of account perfect for access to liquidity at a higher interest rate, but not necessarily good for daily use as your go-to debit card.
Due to financial events relating to the COVID-19 pandemic, however, Regulation D was amended to suspend the institutional reserve requirements to zero, and “delete the six-per-month limit on convenient transfers from the "savings deposit" definition,” thereby allowing unlimited transactions for customers. But account holders still will need to check with their financial institution for specific details on how this regulation may affect their particular account, as the interim rule does not specify that depository institutions are obligated to change their account agreements with customers or the manner in which they must make changes, if they decide to do so.
Money market accounts are considered traditional deposit accounts, and as such are FDIC-insured up to $250,000 per account depositor. With the news of bank failures in March 2023, knowing that these types of accounts are covered by FDIC insurance gives customers peace of mind knowing that their deposits are safe.
What Are the Limits of a Money Market Account?
Money market accounts are great for earning higher interest rates on your cash savings. At the same time, though, there are some limits to what account holders are able to do with a money market account.
- Transactions may be limited to only six-per-month.
- Transactions beyond those six may have fees associated with them, if permitted.
- Account owners may be required to maintain a monthly minimum balance in order to receive a certain APY.
What Should You Use a Money Market Account For?
Even if you have check-writing or debit card privileges, you may not be able to use your money market account to pay monthly bills or make everyday purchases as you would a typical checking or savings account. Recent changes to Regulation D have allowed banking institutions to remove these restrictions on money market accounts if they so choose to.
Because many banks have lowered the minimum required balance to open a money market account, it does make these accounts quite attractive for investors looking to earn a higher rate on their savings. While you may be able to use a money market account for more than six transactions per month, if your financial institution still has the six-per-month limit in place, this account is perfect to have as a savings account that you access only occasionally.
How Safe Are Money Market Accounts?
Money market accounts are FDIC insured, meaning that account holders can rest assured that their accounts will be protected up to $250,000 per account depositor. It is important to make sure that the financial institution you choose to open up an account with is an FDIC-insured institution.
Are Money Market Accounts Taxed?
Interest earned on money market accounts is, in fact, taxable. As with any account that earns interest, you will receive a 1099-INT to report your earnings when you file your taxes. Everyone’s financial situation is different, so for specific information about how this might affect your tax situation, you would need to consult a tax professional.
The Federal Reserve FAQ. "Deletion of Transfer Limit from Savings Deposit Definition — Announced April 24, 2020."
Board of Governors of the Federal Reserve System. "Federal Reserve Board announces interim final rule to delete the six-per-month limit on convenient transfers from the "savings deposit" definition in Regulation D."
Board of Governors of the Federal Reserve System. "Reserve Requirements."
The Federal Reserve. "Reserves Administration Frequently Asked Questions."